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This year has been a good one for stock market investors but 2018 is likely to be trickier, this is the warning from the investment bank Morgan Stanley, today it published its 2018 outlook, it is particularly cautious about the UK market.
Here to tell me more about that is Graham Secker, he’s chief European equity strategist at Morgan Stanley, you’re positing a rise of 5% for the footsie next year, markets have had a very strong run over the course of the last 12 to 18 months and also have occurred with very low volatility.
As we go forward, we think there are a number of things that are beginning to change at the margin, the economic environment slows moderately the uncertainty that we had for some months, it continues into next year, but overall it’s not the UK, we have global equity markets coming under pressure.
There are a number of things that have supported markets over the last few years, the margin is beginning to lose a little bit of steam, we’ve got the Fed raising interest rates, Bank of England tightening and BOJ, all of the central banks over the last few years have been running extremely easy monetary policy which has meant that asset prices go up everywhere across all asset classes.
As they start to take that money back a little bit, it’s good, it’s supported, as you bring it back, you would expect some of that momentum to slow down as well, there’s going to be added volatility in credit markets, credits have been the biggest beneficiary of all this money that’s been printed by these central banks.
As they start to take that away, it’s a natural place where you start to see some cracks emerging, particularly in the US, when US companies have taken on this free money, have bought a lot of debt and have bought back their shares, their leverage ratios are very high.
Their balance sheets look extremely stretched relative to any point over the last 10 to 20 years, interestingly in your comments on the UK stock market, the political situation in the UK is at least as important as brexit, it depends on whether you want to focus on the economy or you want to focus on your job as an investor.
For the economy your main focus is on brexit, that has the greatest potential to impact the economy and slow it down as we go forward over the next 12 to 18 months, however our point is if you’re a UK fund manager looking to invest in companies, it’s the combination of the brexit uncertainty coupled with the domestic political uncertainty in terms of which political party over the next one to two years will be sitting in number 10 and the policies that they put forward.
I kept a radical change in the backdrop, we haven’t seen it for perhaps 30 or 40 years, that’s probably at the extreme end of things, but it’s not something you can categorically rule out, the market will probably perceive initially to be business unfriendly policies that could come through.
You’ve had a very clear trajectory for many years into moving forwards to a fairly business friendly, capital friendly environment, we may start to embark on a different trajectory, that scares fund managers because the thing that they like least as we know is uncertainty.