Global Stock Markets In 2018: Opportunities And Risks

Investing

Global Stock Markets In 2018: Opportunities And Risks

Global stocks soared to historic highs last year. What will 2018 bring? Here we look at some of the major opportunities and risks in the investing landscape this year.

Published on 9 January 2018

Last year saw stock markets across the globe scaling to record heights and delivering unexpectedly high returns. The S&P 500 soared to a level of 2,674, notching a gain of about 19% in 12 months. Tech stocks did even better. Facebook, Amazon, and Netflix rewarded their shareholders with stock price increases of over 50%.

Many conservative investors missed the boom as they waited to time their purchase with a market correction. But these investors waited in vain as share prices didn’t decline. Instead, they went from one peak to the next and in many instances the rising stock valuations defied logic.

So, is it too late to enter the stock market? Will global shares continue to rise or experience a correction or crash this year? Which investments present the best opportunities and which pose the biggest risks for investors in 2018?

Here we take a look at some of the major opportunities and risks in the global investing landscape in 2018.

Opportunities

Opportunities, Risks, Emerging Markets, Gold, Commodities, Bitcoin, FAANG, Quantitative Easing (QE)

Emerging Markets

MSCI’s emerging markets index – which includes China, India, and Korea – gained 35% in 2017, outperforming the MSCI All Country Index, which climbed 22% last year. Richard Turnill, global chief investment strategist at BlackRock, one of the world’s largest asset management companies, says that emerging market stocks can “run higher” this year.

Bill Maldonado, chief investment officer Asia Pacific at HSBC Global Asset Management, holds a similar view. He says that macroeconomic factors have contributed to creating an ideal economic environment. The positive effects on Asian stock markets should extend well into 2018.

The stock markets in China and Korea are likely to grow faster than the rest of the world. The Indian economy is also doing well. It is expected to register an increase of over 7% in its gross domestic product (GDP) in 2018. Its stock market, which provided a return of 33% in 2017, is expected to move higher this year too.

Gold

Gold gained 12% in 2017 but could be poised for an additional increase this year. A comparison of the precious metal’s price with the S&P 500 index shows that gold presents a potentially lucrative buying opportunity.

Indeed, the gold-to-S&P 500 ratio is at its lowest in ten years. Remember that gold prices often vary inversely with stock prices. If share valuations fall, it is likely that gold could see renewed investor interest.

In 2017, bitcoin, the new “digital gold” got all the attention. If the cryptocurrency suffers a reversal in prices, it is likely that money will flow into gold, which has traditionally been viewed as a safe haven.

Commodities

Commodity prices had crashed in 2014 as a result of the decline in demand from China. But there has been a sea change in investor perception about various commodities, especially metals, since then.

Last year saw a sharp rise in metal prices. Palladium – which is utilised to manufacture auto engines – soared 55% in 2017. Aluminium – which is used to make cans, kitchen utensils, and window frames – rose by 34%. Nickel prices increased by 23% as the metal saw greater usage in car batteries. Copper gained 31%, while zinc’s value shot up by 28%.

Jeffrey Gundlach, CEO of DoubleLine – a Los Angeles-based investment firm that manages more than US$100 billion – thinks that current commodity prices are a bargain. Gundlach says, “You go into these massive cycles… The repetition of this is almost eerie. And so if you look at that chart the value in commodities is, historically, exactly where you want it to be a buy.”

Risks

Bitcoin

Many financial experts and analysts have been predicting that the bitcoin bubble will burst soon. Although that hasn’t happened yet, it is a very real possibility.

Why should this matter? It’s important to remember that bitcoin is no longer a niche investment. In January 2017, there were 5.5 million people with an account in Coinbase, a digital currency exchange headquartered in San Francisco. By November, that number had climbed to 13.3 million.

Nomura Instinet, the equity-trading arm of the Nomura group, a Japanese financial services company, says that the wealth effect of bitcoin trading could boost real GDP growth in Japan by 0.3%. A bitcoin crash could result in large losses for investors and lead to negative repercussions in the financial markets.

FAANG stocks

Many analysts say that the sharp increase in prices of the FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks in 2017 is absolutely justified. Each of the tech giants is highly profitable and has a sound business model that is likely to generate greater profits in the coming years.

But if that is true, then why are top executives and the founders of some of these companies selling their shares?

In September 2017, Facebook announced that CEO Mark Zuckerberg will sell between 35 million and 75 million of his shares in the company over an 18-month period. At US$181 for each share, that adds up to billions of dollars.

Jeff Bezos, Amazon’s CEO recently sold a million of his shares for over a billion dollars. This was the second time that he had sold Amazon shares in 2017. The first was in May when he had also sold a million shares. Apple CEO Tim Cook has sold over a hundred million dollars’ worth of Apple stock in 2016 and 2017.

Do these CEOs know something that analysts and investors do not? Although the tech firms are immensely successful, it is also true that their shares could be considered to be overvalued and a market correction could lead to steep declines in prices.

QE unwinding

Since 2007, the US Federal Reserve’s balance sheet has risen from US$0.9 trillion to US$4.4 trillion. This expansion was undertaken to counter the effects of the global financial crisis. Central banks around the world also followed a similar policy of quantitative easing (QE).

But the world’s central banks are now revising their decade-old policies. Interest rates are being raised and the process of unwinding of bloated central bank balance sheets has begun.

What effect will this have? Nobody is sure. Jamie Dimon, CEO of JPMorgan Chase, says, “We’ve never had QE like this before, we’ve never had unwinding like this before. Obviously that should say something to you about the risk that might mean…”

The bottom line

How will stock markets perform in 2018 and beyond? Will geopolitical tensions on the Korean peninsula or elsewhere erupt into full-blown conflict and wreak havoc on the global economy?

Nobody has a crystal ball and can say with certainty where markets are headed in 2018, of course – but this hasn’t stopped analysts from making predictions.

Jeremy Grantham, the founder of asset management firm GMO, is advising stock market investors to “brace for a possible near-term melt up,” which will see share prices shooting up dramatically and then subsequently crashing in the next six months to two years.

Brad McMillan, chief investment officer for Commonwealth Financial Network, a privately-held broker, says, “A great first half and then people are going to start to sober up and sell off. A 2018 recession is possible and 2019 recession probable.”

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