Will it be a happy New Year for investors? Brian Tora reflects on the markets in 2017 and considers what 2018 might have in store

It’s been a funny old year, has 2017. Brian Tora is in reflective mood as he considers the events of the past year and looks ahead to what 2018 might have in store 

While investors have, overall, been treated well during 2017, there have plenty of upsets along the way and in some ways the continued optimism enjoyed by markets seems at odds with events. Perhaps one of the most striking aspects of the year is the speed at which circumstances can change – both for nations and for companies. In turn this has demonstrated that even the most revered of managers can find their investment strategy undermined by unforeseen events. It certainly has been a funny year.

Us and them

Aside from political upheavals – Trump’s ascendancy to the White House, May’s unfortunate judgment in going to the country, Macron’s overturning of the political establishment in France and the threatened break up of Spain – the Euro zone’s fourth largest economy – economic uncertainties cloud the outlook. At home, life after Brexit is looking challenging, with the Bank of England warning of massive job losses in the City of London if no trade deal is reached, whilst elsewhere threats of a trade war with America and the ending of quantitative easing hardly point to a settled future.

Indeed, Central Banks are playing a powerful role in determining the direction of markets. Having arguably rescued the global economy from prolonged recession by printing money furiously, the cash tap is now being progressively turned off. What affect this might have on economic wellbeing and on financial assets is difficult to gauge. The expectation that loose monetary policy would spark inflation turned out not to be the case. But financial assets prospered during this period, leading many to wonder just how much of the cash generated found its way into markets.

Can we learn a lesson from the Millennium bug?

There is arguably a precedent for this. In 1999, Fed Governor Alan Greenspan eased monetary policy ahead of the new millennium. His concern was that the functionality of banks would be interrupted as the clocks ticked over from 1999 to 2000 – the so-called “Millennium Bug”. By pumping money into the system he hoped to avoid a liquidity crisis if the worst happened and bank computers shut down in the New Year.

As it happened, the millennium bug turned out to have little bite and the main beneficiary of the Fed’s munificence appeared to be the army of IT specialists hired by all manner of businesses to head off the impending disaster. Except there was another IT gain over this period. The technology bubble had its roots in the late 1990s as hordes of companies were formed to exploit the growing dependence of business and society upon computers. Many were floated on the stock market on little more than a promise of riches to come in the future, financed by an insatiable appetite amongst investors to ride the technology bandwagon.

Was it just a coincidence that the bubble burst in March 2000, the very month that Mr Greenspan reined in the cash he had freely doled out just a few months previously? It made 2000 a bumpy year for markets as so-called legacy industries were first shunned and then returned to favour as the technology companies that had replaced them amongst the leaders fell from grace and in many cases disappeared altogether. The FTSE 100 Share Index suffered the biggest number of constituent changes in its history – before or since.

The need to be nimble

So what might 2018 have in store for us as monetary conditions start to return to what passed as normal before the financial collapse of 2008? The worry is that households, which have suffered falling income in real terms, may be ill prepared to cope with higher interest rates. And if the unforeseen side effect really was to bolster the value of financial assets, could they see a retrenchment if liquidity tightens? Only time will tell, but 2018 is looking like a year when investors will need to be nimble on their feet.

The Governor of the Bank of England at the time of the financial crisis of a decade ago was Mervyn, now Lord, King. An academic economist who joined the Bank in 1991 as Chief Economist, he penned his account of the upheaval that took place and posited some lessons for the future. Entitled “The End of Alchemy”, he concluded the old model was broken and that banks should never be allowed to gear themselves as much as they did in the run up to 2007, or to create such complex and little understood structures as those that accelerated the collapse.

We will have to see if governments and regulators heed his advice, but President Trump is already contending that the financial sector is over regulated. The signs are that the global economy is set to continue its recovery and that China is managing its transition to a consumer society better than could have been hoped. But geo-political issues lurk just over the horizon, while potential financial upsets must remain on any investors watch list. With luck we will survive the unwinding of QE unscathed and 2018 will not see the end of the longest running bull market in generations. But investors and their advisers need to keep a watchful eye on events.