Capital markets' drizzle - but plenty to smile about

In meteorological terms, this year has been represented by cold drizzle punctuated by infrequent but terrifying thunderstorms
Claire McCombe

IF the experience of investors could be described in meteorological terms, 2018 would surely be represented by cold drizzle punctuated by infrequent, but fairly terrifying thunderstorms.

Of course, not everyone has been miserable. The doomsayer trade, parched by a crisis free 2017, is clearly feeling replenished by a year that has so far managed to provide both negative headlines and a few more fundamental factors to worry about. As we have pointed out elsewhere, some of these fears look overblown to us.

With the next recession still not yet visible on the horizon, the onus remains on investors to find ways to profit from ongoing economic growth. Equities remain the most attractively priced option here. For their part, bonds are happily providing slightly more appetisingly valued shelter from the storms that could always lie in wait.

So why has 2018 been so difficult? Just as there were several contributing factors to the makings of 2017, from a synchronised surge in global economic growth to a more amenable bond market, so this year's difficulties stem from a variety of sources. The most marketable cause of the trickier investing backdrop in 2018 is of course the trade war.

Much like Brexit, the trade war's importance to the world's capital markets has been exaggerated so far. China's mostly deliberate economic slowdown, a correction in bond prices and several transitory bumps in the road for Europe have all been both unrelated to trade tensions and likely more important factors for investors to consider.

The fact that, in sentiment terms, investors entered the year with little in the way of a cushion to absorb these negative shocks to their outlook has further added to the market malaise.

Why should next year be any easier? The political sphere may well remain capricious in 2019; it certainly seems unwise to bet against it. Though our recession indicators are not yet flashing amber, there are a few signs that we are in the late stages of this already elongated economic cycle.

While the US consumer and the banking sector have remained more chaste in the aftermath of the Great Financial Crisis, the world's corporate sector has borrowed heavily. US interest rates will creep nearer to the point where they should start to deny the US and global economy the oxygen required for further strong growth.

Meanwhile, the swoon in the European economy may owe more to transitory factors than is widely realised. It is set to be another difficult year politically for Europe, but this is well known and should be factored into asset prices. Some of the upside potential for European integration however looks less well understood and priced.

For now, we still find more to smile than frown about in the 12-month outlook for investment returns. Finding the appropriate perspective for the many threats that are (always) ranged against the global economy remains the toughest challenge.

We exit 2018 well positioned for disappointment in many areas of the world's capital markets. If such gloom does not fully materialise as we still expect, stocks should continue to outperform bonds.

:: Claire McCombe is a private banker at Barclays Wealth & Investments NI

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