With the global stock markets continuing their bull run, performance from US and Asian markets continue to be the strongest. With S&P500, Dow Jones, Nasdaq and Nikkei 225 all hitting their record highs, investors will need to consider if there is still steam in the market and position their investments accordingly.
Optimism in the US economy has risen from a strong 3Q17 GDP as they reported a 3 percent growth. This is supported by strong earnings from the tech sector and status quo of the Federal Reserve with its new Chairman’s normalisation policy. Greater confidence has been shown with the impending reverse quantitative easing program, higher oil prices and inflation.
However, the key risk for the US market will be the proposed tax cut. Should it go through, it will add US$1.5 trillion to its current US$19 trillion debt and congress will have to find US$4 trillion of offsets to cover the gap caused by the tax cut.
Despite the challenges, the US market is expected to continue its growth. Technology, financials, value, healthcare and dividend-growth ETFs are expected to be the main drivers.
Based on the current economic data, Europe is seeing strong growth while inflation remains low. Advance figure of 3Q17 figure placed expansion at 2.5 percent in comparison with previous quarter’s 2.3 percent. This will put the 3 quarters growth at a high average of 2.1 percent, signifying a strong recovery of the European economy. With stronger domestic demand and improved trade balance, this recovery is broad-based rather than focused on certain areas.
However, the key risk for Europe remains to be its strong currency which is viewed as a disadvantage for its exports and the current political volatility the region is facing. Analysts from DBS Research believe that Germany should outperform the overall Eurozone and investors should invest in Germany-focused ETFs.
“Abenomics” has been in work, with Japan’s GDP growing at the fastest pace in 2 years at 2.5 percent. This is supported by higher consumer expenditure and capital from the rising exports and investments.
Key risks for Japan is with Abe struggling with his third reform, tight labour market, widening deficit in the government, aging population, deflation and the widening productivity gap between manufacturing and services.
In overall, growth is expected to continue for Japan with stronger corporate earnings, rising dividends, share buybacks, aggressive central bank and cheaper valuations among developed markets.
Growth in the emerging markets continue and is expected to outperform global growth. However, keys risks remain to be changes in trade segment, currency and political driven events. Therefore, investors should continue to look at emerging markets for growth but on a selective basis.
Among Brazil, Russia, India and China (BRIC), Brazil and Russia were down due to the uncertainties in their political landscape. India and China are moving up as oil prices recover and are benefiting the two nations. In this aspect, the expected strengthening of oil prices will benefit the two countries.
Gold has fallen over 10 percent this year as the rising interest rates are taking a toll on gold prices. As metal has no yield, the rising interest rates will adversely impact the prices of gold as investors price in the opportunity costs of holding it. However, there is still a chance of recovery for gold as geopolitical risk increases. Should tension between US and North Korea escalate, prices of gold will see a rebound as the metal is a known safe haven during times of risk.
Several factors have led to the higher oil prices in the past few months. These include Nigerian militants threatening to attack oil installations in the country; Venezuelans’ plan to restructure its debt on its oil operations; and the falling crude oil inventory in the US. All of these have led to the near-term increase in oil prices.
In a long-term view, the increasing power shift in Saudi Arabia and US’s refusal to certify Iran’s compliance with the nuclear agreements and the possibility of reinstating the embargo on Iran’s oil export may cause oil prices to increase sharply.
Analysts from DBS Research remain optimistic about the recovery of crude oil and the oil and gas sector. Price forecast of crude oil for 2018 is in the range of US$60 to US$65 per barrel.
In 2017, the outline of the currency market is the strengthening Euros (EUR) and weakening US Dollars (USD). After three years of growth in USD, the currency fell to its lowest point since 2011. EUR has been increasing on the back of economy pickup and reducing political risk in the region.
A turning point for USD is expected in 2018 and investors should look out for changes in policy from the Federal Reserve and passing of the tax reform.