Markets entered 2018 on a strong footing; economic data prints continued to show the global economy in good health, while recently passed tax cuts in the US helped to boost the prospects for US corporates, the economy and inflation expectations. Those tax cuts have seen the corporate rate of tax reduced from 35% to 21% effective this month, and investment expenditure eligible for immediate expensing, thus reducing near-term taxation even further.
January therefore had markets in classic risk-on mode; as global equities moved decisively higher as bond prices fell. Emerging markets and Asia were the stand-out performers; Brent oil rose to around $70bbl during the month, providing a huge boost to energy exporters Brazil and Russia, while dollar softness fuelled the outperformance of Asian equity markets. In the UK, the FTSE 100 and 250 declined as investors shunned Brexit uncertainty.
The positive outlook in the West, however, became less and less surprising to investors and the real highlight was in China, where policy tightening showed signs of slowing down. Interest rates stopped rising and there was an absence of major tightening measures in recent weeks. China has now overtaken the US as the driver of global economic growth, so tightening of financial conditions and a slowing of its economy would be a major headwind to the world’s economic growth momentum.
Following very strong performance from equity markets and a changing direction in yields, we are closely watching the progression of inflation and monetary policy. At this juncture however, equities remain more attractive than bonds and we continue to prefer the US where the quality of corporate earnings is high and supported by an already strong economy that stands to benefit from the fiscal tailwind taking effect this year.
Anna Haugaard, CFA
The value of investments can fall and you may get back less than you invested.
If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset.
The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.