This time last year we were forecasting a year that should have benefited the equity market. With only two days left, the chance of anything drastic happening is mostly diluted by the festive spirit, literally. We can thus safely review our current 2017 figures as probably being representative for the whole year.
European equities have in fact been top performers. The Euro Stoxx 50 index, which reflects the performance of the largest 50 European companies, has increased by 11.5% since December 2016 when dividends are taken into account.
When this is compared to the bond market, the gap between performances is immediately evident. The European Investment grade market gained a miserable 1.78%; the livelier European High Yield market gained a more respectable 4.78%, but it still pales against equity returns. Figures are taken from general market indices that reflect the aggregate performance of the asset class.
Digging a little deeper, further performance could have been extracted by investing in particular countries within Europe. The German DAX index gained 13.86%, while the French CAC gain 13.65%. The riskier and sometimes troubled Italian MIB gained 18.81%, but in all honesty it was never on my ‘conservative’ radar.
At this point there is a deep surge coming from my gut wanting to shout out the typical four words, ‘I told you so’. What holds me back is only the fear of karma going into 2018. In my opinion, the European equity market reacted to expectations of a healthier economic environment that, month after month, was confirmed by healthy data. This scenario was widely expected and communicated.
Add to the fact a dovish European Central Bank and a hawkish US Federal reserve are only playing second fiddle to market expectations and the trend is set for further upside.
Looking at what happened on the other side of the western investment world, the benchmark S&P 500 gained 22.23% since the start of this year. The US equity market performance was only dented by the relative weakness of the dollar. When converting US equity gains into Euro, a European investor would lose a massive 13.47% this year. Should the performance of the S&P 500 Euros was to be adjusted, this would downgrade returns to a ‘low’ 8.76%.
What about 2018? The EU appears to be gaining ground. Economic fundamentals are exerting a bigger pull after years of playing sidekick to central bank monetary policy. The Eurozone is expected to increase growth again next year. On the other hand, the US is trying very hard to convince that it has not passed its economic peak.
I therefore expect a gradual reprisal of this year’s main trend, that is, European Equities will continue to trend upwards as will the relative value between the euro and the dollar. Economic fundamentals will play a larger role in valuations, data expectations and confidence indicators will be more important. Company earning will be a crucial indicator if they follow the upward trend, thus justifying expectations.
Inflation? That is an argument for another day, maybe another year. All the best for 2018!
Disclaimer:
This article was issued by Antoine Briffa, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.