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On all cylinders

09 January 2018

Stocks surged in the fourth quarter, concluding a strong year for growth and markets alike, reports CIO Chris Ralph.

Last year the S&P 500, for the first time in its history, rose in every month of the year, a symptom of both investor confidence and the absence of major shocks.

The fourth quarter made an outsized contribution to performance in what was already a strong year. The world’s leading index, the S&P 500, rose 19.4% over the twelve-month period. Early in the year, the Dow Jones Industrial Average broke through 20,000 for the first time, only to then break through 25,000 in the first week of 2018.

Corporate earnings made a strong showing in the US, not least among technology companies, while the US president’s end-of-year success in securing his tax cuts plan further contributed to optimism on markets. December also saw the Federal Reserve raise rates for the third time in 2017, indicating its own confidence in the trajectory of US growth – official figures released in the fourth quarter showed annualised GDP growth at 3.2%.

Yet if America led the way, it was far from alone. The MSCI World rose by more than 20% in 2017 and, by the fourth quarter, all major economies were growing at a healthy pace. The eurozone recovery was particularly noticeable, and was aided by the election of centrist leaders in the Netherlands, France and Germany. The election of Emmanuel Macron in France was warmly welcomed by markets, as were his moves to reduce the wealth tax and change labour bargaining rules. Despite a more muted fourth quarter, the Eurofirst 300 rose 7% in 2017.

After months of reversals, Theresa May achieved her aim of winning EU approval to move UK exit negotiations to phase two, albeit having acceded to EU demands over negotiation sequencing, the exit bill and Northern Ireland. The approval followed a fraught year in which she triggered Article 50; lost her majority in a snap general election; delivered a well-received keynote speech on Brexit in Florence; delivered a disastrous speech at Party conference; lost two cabinet ministers in the space of eight days; and lost her first parliamentary vote. She also presided over indicators that saw UK growth fall mid-year to the lowest of any EU28 or G7 country.

By the late autumn, however, growth projections had improved, and the final quarter marked the twentieth consecutive quarter of UK growth. The FTSE 100 rose 7.6% over the course of the year, posting more than half of the increase in the final quarter of the year. Perhaps the most notable shift in the UK economy came in the form of inflation, which tracked upwards over the course of the year, and in December struck 3.1%, breaching its target band. Yet wage growth failed to follow suit and savings rates fell to a 50-year low.

Sluggish wage growth figures marred the Autumn Budget. The Office for Budget Responsibility downgraded its growth projections on the basis that the UK would complete two decades without wage growth. The revised growth figures implied there would still be a sizeable budget deficit in 2022 and that UK debt wouldn’t fall to pre-crisis levels until the 2060s. The Chancellor adopted a relatively light touch, raising two of the Income Tax thresholds, targeting housebuilding, and leaving pensions largely alone.

Growth in Asia and emerging markets played a major part in the improving global outlook. China and India both continued to grow at a reasonable pace, and Hong Kong’s Hang Seng index (which includes many mainland Chinese companies) rose 36% over the course of the year. Japan’s growth rate increased significantly over the course of the year. Shinzo Abe won a ‘supermajority’ in elections in Japan, adding momentum to his push for corporate reforms and to rising stock prices. The Nikkei 225 rose by almost 12% in the final quarter of the year, and by more than 19% over 2017 as a whole.

Despite the rate at which stock indices progressed, differentiation was significant. Technology stocks were notable outperformers through the year. In the US, the technology majors far outperformed the market, buoyed by both earnings and sentiment. Their impact on broader indices is significant – the five largest listed stocks in the world are all technology stocks. They were outdone, however, by China’s top three internet stocks. Last year the ‘BATs’ (Baidu, Alibaba and Tencent) rose by more than 80%.

In recent years, global growth has often been patchy and corporate earnings fitful, but growth in 2017 was notably broad-based, while corporate earnings improved materially. Investors can never afford to let optimism compromise their approach, but they do at least head into the new year confronted by the best economic backdrop seen for several years.



Source: FTSE International Limited ("FTSE") © FTSE 2016. "FTSE ®" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any libaility for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Source: MSCI.  MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein.  The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products.  This  report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

© S&P Dow Jones LLC 20[16]. All rights reserved.



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