2017 might have been a politically turbulent year, with geo-political tensions such as Brexit and North Korea dominating the headlines.
But for markets, 2017 was actually an outstanding 12 months, characterised by strong performance and low volatility.
The FTSE 100 reached all-time highs on numerous occasions and finished the year with yet another record close. New all-time levels were also reached on markets in the US, South Korea, India and Germany.
There is a synchronised economic recovery taking place that is likely to continue in many of the world’s major regions and this should provide a platform for respectable returns.
Indeed, in 2018 we could well see more stock market records; the consensus is that global growth will hit 3.5 per cent to 4 per cent this year, with most G7 economies predicted to expand by more than 2 per cent.
The US market should be boosted by President Trump’s recent business-friendly tax package and this should mean continuing strong profits growth, which is supportive for equities.
In addition, real-time growth indicators such as Purchasing Managers’ Indices (PMIs) generally point to stronger global growth and, all things being equal, this should underpin another year of respectable returns.
A note of caution, however, would be that 2017 was almost as good as it gets on the markets, so there is now more room for disappointment than in previous years.
We are beginning to see some monetary policy divergence, which may unsettle some investors, and there are a few other areas that could produce a curve ball into the markets.
While inflation in the US is still low, it is rising, and we are likely to see more rate hikes in 2018, which may cause some nervousness.
Rising interest rates and currently high equity valuations provide cause for caution, but interest rates would have to rise significantly before investors felt their assets would be better off in cash or bonds than equities.
That seems very unlikely for the foreseeable future but a few upside surprises to inflation could cause a few jitters.
Interestingly, however, research by Brewin Dolphin shows that the correlation between interest rates and equity performance may have been overplayed.
Our data suggests that, in fact, the extraordinary growth in global M1 money supply in the latest cycle shows a stronger correlation with market outperformance than the level of interest rates.
Crucially, one of the main drivers of this is China.
M1 money supply essentially refers to liquid cash and this is generally created by the combined actions of policymakers and banks. Although the developed world’s central banks have been infamous for the stimulus they have imparted, more recently China has been the most aggressive chaser of growth.
During the financial crisis, Chinese banks embarked on a lending spree to sustain its economic growth. But our research shows that, in 2016, China’s policy was even looser, resulting in a glut of M1 money entering the global economy.