With 41 days to go, it appears Christmas has come early this season for many investors.
The returns in 2017, at least for equity investors, are staggering. The DAX is higher by some 16 percent because the start of the yr; the S&P 500 offers rallied 15 percent with both markets hitting record after record; and previously unloved emerging markets like Brazil have spiked 20 percent.
Driving this is what many phone a “sweet spot” meant for investors: a backdrop of sound growth, low inflation, strong business earnings and consistently supportive monetary policy from central banks, despite initiatives to gradually tighten stimulus.
In addition, we remain expecting U.S. President Donald Trump’s tax reform to be approved before year-end, that could offer another fillip to risky assets, when gradually approved.
As the finish of 2017 nears, the question presents itself. Could it be time to finish off your portfolio for the entire year and take the gains or perform you chase the rally further more into year-end?
Regarding to Larry Hatheway, chief economist and brain of investment alternatives at GAM, the impressive gains could possibly be here to stay.
In a letter the other day, the strategist wrote: “The biggest risk to investors over the remainder of 2017 is an upside melt-up in equity market segments. Some regard equity markets and valuations, having made quite strong advances in 2017, as stretched. However, momentum is a distinct driver in the brief run for all markets, including for equities, and there is a good sense that we may see a further surge in equities in the final quarter, which many investors may not be ready for.”
The warning from GAM doesn’t get substantially clearer than this – the nice times in equities aren’t over yet.
And that trend will not seem to be stopping soon, despite the gradual approach higher in interest levels, which have historically dampened collateral returns – at least, according to Yianos Kontopoulos, global brain of macro strategy at UBS.
In the bank’s 2018 outlook, he wrote: “2017 is a key exemplory case of how yields can rise modestly, P/Es (cost earnings multiples) can moderate, and equities deliver strong returns simultaneously. As prolonged as it really is driven by growth, while inflation will not rise as well sharply, we believe it is sustainable.”
Evidently, the common worry that most analysts share may be the “I” word – inflation. It has been the missing ingredient in the upturn as inflation levels have already been stubbornly low across developed markets, confusing policy makers and investors alike.
While the risk of an abrupt surge in inflation is low, according to UBS, it could possibly be non-growth related factors, such a spike in oil rates, that could finally catapult it higher.
Looking past the threat of inflation returning, and other regularly cited worries – such as huge valuations; record low volatility, which can often be seen as a sign of investor complacency; and geopolitical incidents such as North Korea or the upcoming Italian elections – could possibly be a big ask for investors.
But just like the all-too-familiar “Don’t battle the Fed” caution, it could just be best to follow the similarly familiar “the tendency is your friend” mantra. In that case, that Christmas tipple could taste a little sweeter.