January, not surprisingly, is a pretty quiet time in the financial markets and around the place in general.   That said, we could almost reprint the opening sentiment from our last Newsletter:  “the outlook for the world economy continues to strengthen despite seemingly constant and sometimes self-inflicted geo-political issues”.

The Christmas holidays is a good time to actually sit and read a lot of the written material that comes across our desks and computer screens, and try to filter it; to weed out the outlier thoughts (there’s always a rampant optimist and for each of those there’s a half dozen doom-and-gloomers), and condense an array of views into what might likely be ahead of us…… in the absence of a crystal ball we have to consider what’s likely and reasonable to expect, all things equal.

I sit here with a cautiously optimistic view for 2018, with every reason to look positively at our own and the world’s economic prospects and, accordingly, the world’s financial markets reflecting the fact that opportunities continue to exist for good operators to capitalise on.

Who knows what might happen in the world’s political hotspots, but it is reasonable to expect that ultimately sanity prevails.  Geopolitics will continue to fuel volatility, but volatility is a constant companion of markets to varying degrees anyway.  And as we often discuss with clients, it is this very volatility that allows good investors (and investment managers) to find bargains to invest in for us – it is in times of volatility that shares “return to their rightful owners” as renowned US investor Peter Lynch observed.

To convey a snapshot of recent conversations and communications with some respected investment managers:

  • Despite the world’s political rough-housing in recent months, the investment Volatility Index is very low.  But investors may be shaken awake when the US Fed raises interest rates and if the political argy bargy escalates.
  • Growth in Australia and globally is expected to be sound, and underlying fundamentals are strengthening.  Importantly, this is reflected broadly: a “synchronised” strengthening across just about all major economies.
  • Business confidence is high.  Consumer confidence is sound but will improve when wages start to grow.
  • There has been a lot of talk about the historically high US share market and whether a crash is coming.  The S&P 500 has risen by 16% in the last 6 months (our ASX 200 by +5.8%) and a whopping 89.8% in the past 5 years (ASX 200 by +25%) so the talk is understandable but the consensus view is less pessimistic:  the underlying economics are genuinely strong and the impacts of US tax cuts and the likelihood of very large sums of money being repatriated to the US are expected to support investment markets.  (see below for a good video opinion piece from PM Capital).

The message for us and our clients is to remember is that we know volatility is always present and it is therefore critical to ensure we’re applying that appropriately to an individual’s circumstances.  It is usually a different picture for a young family, versus a late-40’s/early 50’s family with no debt and no more school fees, versus retirees and soon-to-retire families.    **See This Month’s Tip…. Keep up the Review meetings! J

On the subject of the US S&P500 market, it has just turned 60.  Here’s an interesting little diagram of how things have changed in the US in 60 years….

Sources:  RBA, Ausbil, AMP, Fidelity, Franklin Templeton, PM Capital.