At the start of 2017 investors might have been forgiven for expecting a more predictable year ahead. If they were, they were sorely disappointed by a year of intrigue – and yet asset prices kept rising, despite the drama.
We asked the experts to dust off their crystal balls once more to see what lies ahead in 2018.
The FTSE 100 has surged over the past two years, defying all manner of political uncertainty. Britain’s blue-chip index is set to continue its ascent, but at a slower pace, investors say.
Gaurav Saroliya, director of macro strategy at Oxford Economics, gives a rough target of 7,725 points for the FTSE 100 by the end of 2018 – a hardly stellar 0.5 per cent rise after a year in which UK stocks have jumped.
“Equity markets will be sustained by the difficulty in achieving value in any other investment category,” according to Douglas McWilliams, deputy chairman of the Centre for Economics and Business Research (CEBR) – although UK equities could trade “sideways” if share price swings come back into vogue, he adds.
Mike Bell, global market strategist at JP Morgan Asset Management, says: “The FTSE 100 should continue to make gains in 2018 as global growth remains positive and supports the foreign revenues which make up close to 70 per cent of the FTSE 100’s sales.”
However, companies with less exposure to the balm of strengthening global growth might struggle to make headway.
“The outlook for more domestically focused mid- and small-cap stocks is far more uncertain, with UK consumer confidence notably weaker than elsewhere in the world,” says Bell.
There are a “number of conflicting signals” around companies exposed to the UK economy, note Simon Brazier, Blake Hutchins and Matt Evans, portfolio managers at Investec. Trade and low unemployment on the one hand should give bulls confidence, but bears will note low savings at a time when real wages are still falling.
Perhaps the biggest surprise for those sticking their necks out this time last year has been the astonishing lack of volatility in financial markets – even as politicians did their best to keep investors guessing.
The Vix – the so-called fear index which tracks the volatility of the S&P 500 – broke through the 10 mark for large portions of last year, representing unprecedented placid financial conditions as stock markets kept on giving investors profits.
There is likely to be no let-up in political risks. The investigation into Russian connections to US President Donald Trump's election campaign means impeachment is still an undoubted risk for 2018. Meanwhile, Theresa May's weak government continues to battle foes on all sides.
Yet it seems only macroeconomic changes will spur volatility, according to Eoin Murray, head of investment at Hermes Investment Management. “Caution is warranted”, he adds, as central banks keep on adjusting quantitative easing programmes.
Russ Mould, investment director at fund platform AJ Bell, warns: “Markets are always at their most dangerous when making money seems easiest, and healthy returns from global equities in 2017 mean that there is a danger that investors are lulled into a false sense of security, especially as volatility has been remarkably low.”
A combination of solid growth, low core inflation, and easy financial conditions mean central bankers can normalize monetary policy – slowing the pace of asset purchases and gradually raising interest rates in 2018 without investors taking fright and selling bonds, according to strategists at investment bank UBS.
Markets’ “rational exuberance” is justified, according to Ajay Rajadhyaksha, head of macro research at Barclays. The bank predicts US 10-year yields, which move inversely to prices, will rise to only 2.5 per cent at the end of 2018.
Read more: UK inflation hits 3.1 per cent
Inflation is not set to pick up markedly around the world, meaning the real returns on bonds will remain attractive, according to Bhanu Baweja, a UBS strategist, although keeping an eye on the oil price will be important.
Then there is also the small matter of massive central bank balance sheets: the European Central Bank and the Bank of Japan will continue to buy bonds, albeit at slower speeds, and tightening will not prompt a return of the “taper tantrums” which saw bond prices crash in 2013.
One of the best ways to end up with pie on your face last year was to go with the consensus on major currencies: few, if any, predicted a six per cent surge in the euro, according to the European Central Bank’s trade-weighted index, while even sterling has recovered handily from historic lows at the end of 2016.
There won’t be a repeat this year, however, according to Jeremy Cook, chief economist at payments firm World First. He predicts the pound will have barely moved by the end of the year at $1.35 at year end.
It will be a similar story against the euro, Barclays say. The pound will push it back down to £0.85, the bank predicts, although they warn that the Brexit process will be the most important determining factor, the easiest prediction to make this year.
The all-encompassing Brexit process remains the biggest risk to UK growth, according to Huw Pill, chief European economist at Goldman Sachs Research, but “looking forward we continue to see an ongoing expansion without any great dislocations for the financial system or the economy.”
Most people will know “black swans” by now: highly unlikely events which nevertheless manage to happen. By their nature they are unpredictable, but economists and analysts also foresee some “grey swans” as well – unlikely, but clearly visible.
For Europe the most notable grey swan to mark in calendars is the Italian election. The EU sailed past a host of potential electoral storms in 2017. Italy, a core member of the Eurozone, will choose a Prime Minister on 4 March, with the small possibility of an anti-euro government taking power.
Then there are the strongmen: North Korea’s leadership has long prided itself on being predictably unpredictable, but now it claims to be armed with the ability to strike the US mainland with nuclear weapons. Trump’s reaction could be one of the defining aspects of his Presidency.
Their neighbours, Russia, offer another potential stumbling block, with elections also due in March. The most prominent opponent to Vladimir Putin’s regime, Alexei Navalny, has already been banned from taking part. Perhaps there will be a “last throw of the dice” by Putin in the Baltic states to distract from the weak economy, suggests CEBR’s McWilliams.
Deutsche Bank boss John Cryan gave his employees a rhetorical new year’s gift this week when he told a German newspaper that staff will receive “normal” bonuses and pay increases for the first time in years, after cutting them in 2016.
So what is the new normal for banking payouts? Don’t look for a return to the pre-financial crisis norm with money all round, according to Alice Leguay, a co-founder and chief operating officer of Emolument, a salary benchmarking site. Many bankers will be picking up the dreaded “doughnut” over the course of 2018, as bonus culture continues the shift towards rewarding star performers at the expense of also-rans.
However, the year will also see a growing trend of bonus increases for millennials, as banks try to fight off the challenge from trendier tech sectors, start-ups, and other jobs where employees don’t have to wear a tie, she adds.
“Banks are paying up for millennials,” Leguay says, with Emolument data showing increases at the analyst and vice-president levels.