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Russ Mould, investment director at AJ Bell, says Brexit and the squeeze on consumer spending will continue to spook investors in 2018.
Here are five walls of worry for investors to climb in 2018
1. Brexit talks, the pound and the UK stock market
“Ongoing uncertainty over how the Brexit talks may ultimately pan out, and what they may mean for the broader British economy and the pound, continue to dominate sentiment toward the UK’s equity market. There is perceived political risk as well, in the form of a Government without a majority and an opposition party which is seen as no friend of the markets.
Yet the UK underperformed the FTSE All World in sterling total return terms in both 2016 and 2017 and comes with a currency which looks cheap on a purchasing power parity basis. It may not take much for the UK stock market to surprise on the upside in 2018, especially as the index could derive support from its projected 4.3 per cent dividend yield.”
“Retail stocks are being hammered by fears of the Amazon effect, sticky inflation that is crimping consumer spending power and weak consumer confidence. But several very profitable names are now looking cheap and offer fat dividend yields for good measure and if history is any guide this is one sector which could do well were the pound to surprise by rallying (either as the Brexit talks go smoothly, the Bank of England moves more quickly than expected or something goes wrong elsewhere).”
“Japan is a mystery to many, with a debt-to-GDP ratio that would embarrass Greece, unhelpful demographics and a corporate landscape where 2017’s headlines are dominated by misreporting or accounting scandals at Toshiba, Kobe Steel and others.
“But the political situation is stable, corporate governance is improving thanks to the launch of the JPX-Nikkei 400 index, the economy has just put together its best run of growth in a decade and the headline Nikkei 225 index does not look expensive relative to its history on earnings, not least because it still trades more than 40 per cent below its 1989 peak.”
Source: Thomson Reuters
Source: Thomson Reuters Datastream
4. Emerging Markets
“After several years in the wilderness, Emerging Markets have had two good years, buoyed by improving global growth, a weak dollar and drops in inflation which means interest rates are falling in major countries, not rising as in the West.
“They are still treated with scepticism in many quarters, owing to their commodity exposure (Brazil, Russia) or political risk (Mexico owing to NAFTA talks, South Africa or Brazil again) and this may mean there is selective value to be had. Emerging Markets overall are not expensive on a price/book basis at around 1.7 times compared to cyclical peaks north of 3.0 and there is gathering yield support in some markets too.”
5. Precious metals
“In dollar terms silver is broadly flat this year and gold up by some 10%, returns which pale next to those made by Bitcoin and it does look as if bulls of the precious metals are throwing in the towel, lured away by cryptocurrencies or the prospect of rising interest rates or both.
“Yet if inflation does begin to surprise on the upside gold and silver still have the potential to come back into favour, especially as sentiment seems so washed out.”
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