2018 Investment Outlook

 

“Prediction is very difficult, especially if it’s about the future.” – Niels Bohr.

People interested in investing typically find themselves deluged with forecasts at this time of year, and a look back at investment professional’s predictions from this time last year will tell you just how difficult it is to be right. So, I’m going to be careful here! The purpose of this post is not to make bold predictions for the year, and it is certainly not to be considered investment advice. However it is interesting to take a look at current trends, along with results from last year, and consider how things might develop in 2018. So here we go…

2017 was supposed to be the year of the crash. This time last year every forecaster worth his salt was telling us that winter was coming. The Trump rally couldn’t last, central banks had to taper their stimulus programs, and the party was going to end. It was going to get ugly…

Well… S&P 500 +21.8%…. MSCI Emerging Markets +31%…. MSCI Europe +14.5%…. UK FTSE 100 +11.9%…. Japan Topix 22.2%…. even Japan hit 26 year highs!

Oil came back strongly at year end, gold was up double digits, even pound sterling recovered somewhat. Not to mention the surge in Cryptocurrency! 2017 was not a good year to be holed up in your bunker, hoarding cash and waiting for the sky to fall. What was perhaps most surprising was the lack of volatility through the year – the US stock market hasn’t seen a major pullback since the election, and volatility metrics have hit record lows.

So the party goes on, right?

Well, we will see. The fact remains that we are living in an unreal world economically. Negative interest rates are not supposed to be a thing, but they are currently reality in several countries. Moreover, negative real interest rates (when taking inflation into account) have been the norm in the developed world since October 2016. On January 9th the Bank of Japan announced that it was reducing the rate of bond purchases as part of its quantitive easing program. This reduction was relatively small, and well within the BOJ’s stated goals. It was really a non-event. However, as soon as it was announced, the Yen spiked up and markets shuddered. So imagine where we’ll be if something really happens…

The US Federal Reserve has gradually increased interest rates, and so far managed to do so without slowing the stock market’s bull run. Japan, however, is another matter. The run up in the Nikkei at the end of 2017 / early 2018 owes a lot to loose monetary policy, not to mention massive ETF purchases by the BOJ. The Abe administration doesn’t want the run to end, but it can’t go on forever.

Sorry if this is too much detail, but what I’m really saying is the crash / correction is still coming. It’s just a matter of time.

Given what happened last year, this doesn’t necessarily mean you should liquidate everything and crawl into your bunker right now. We have no idea how much longer the party will run before the inevitable end. The important thing is to know the end is coming and to plan accordingly. Here are some ways we can all do that:

Diversify – if you are 100% in stocks today, you are perhaps overexposed. It could be a good time to move into a more diversified asset allocation.

Rebalance – if you are already in a diversified allocation but have not made any changes recently, you may find that the stock run-up has left you overweight equities. You may have started with 40% in stocks but now that weighting is over 50%. Rebalancing back to your original asset allocation is a disciplined way to buy low and sell high.

Consider getting some gold – if you haven’t already, you may want to make an allocation to gold, which tends to perform well when panic sets in. Also commodity prices seem to be turning around in general, which is good news for metals.

Expect a strong Yen – we’ve seen time and again that the Yen is seen as a safe haven in times of trouble. If you live in Japan and send money home, there may be a big opportunity coming your way.

Stick to your plan – if you are relatively young and investing for the long term, you don’t need to worry too much about market downturns. Remember why you started in the first place and don’t panic.

Keep some powder dry – a crash is a fabulous opportunity to buy cheap. Have some cash at the ready and be greedy when others are fearful.

Consider inverse ETFs – if you are particularly aggressive and have a high level of conviction that the market will go down, then inverse ETFs are a simple way to short the market. Inverse ETFs use derivatives to profit from a decline in an underlying benchmark. Be aware that many of these ETFs are leveraged, and not only magnify returns, but can double or triple your losses if you are wrong.

Finally, a word on Cryptocurrency: After the incredible run of Bitcoin and numerous other coins last year, more and more people are getting into crypto trading and investing. The digitalisation of money is just beginning, and there are fantastic opportunities out there, but do your own research. Buying Bitcoin with no knowledge of how it works, just because it’s going up in value, is pure folly. I’m not going to tell you Bitcoin is or isn’t in a bubble, or that Ripple or Litecoin are going to take over. If you are interested in the concept of cryptocurrency then study it, invest a little to get some skin in the game, and study some more. Only invest according to your level of knowledge and don’t get caught up in herd mentality.

With that I wish you all the best in 2018. Let’s hope winter doesn’t come too soon.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.