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Investment Trends of 2018

Forms of investments and strategies

The 10 most important opportunities and risks

9 minute read

 

2017 was a good year for the stock market. The start of a new year bears new challenges. We look at 2018 and examine the opportunities and risks that investors should pay attention to. What will be the drivers of the economy in 2018?

 

Which trends should you follow? What events could send prices downhill?

 

 

1. Investments in technology continue to be drivers of growth on stock markets

Chinese and American tech companies were the drivers behind the upturn on stock markets worldwide. The so-called FANG stocks (Facebook, Amazon, Netflix, and Google/Alphabet) were also among the best investments of 2017 with an annual performance of 49.3 percent. Apple (+53.3%) and Microsoft (+38.3%) also performed well.

The list of the most valuable companies in the world since the summer of last year also reflects this upturn. The six most valuable companies – Apple, Alphabet, Microsoft, Amazon, Facebook, and Alibaba – all were technology companies financed by venture capital. The advance of the tech giants is expected to continue in 2018.

The most exciting technological trends that investors should follow in 2018 include 3D printers, commercial drones, cloud computing, e-mobility, artificial intelligence (AI), machine learning (ML), and blockchain applications. The last few received considerable public interest, especially from the cryptocurrency boom. 2018 could be the year in which the field of blockchain separates wheat from chaff. These trends will also continue in investments outside of the stock market, such as in equity crowdfunding.

 

2. Emerging economies demonstrate strong growth

Last year, emerging economies like China, India, Mexico, and Brazil brought great joy to investors. The emerging market index MSCI Emerging Markets, for example, rose by around 30 percent in 2017. According to financial experts, this trend will continue in 2018.

Both the US investment bank Goldman Sachs and the major Swiss bank Credit Suisse are forecasting healthy global economic growth for 2018. Both financial institutions agree that the lion's share of growth will come not from the industrialized countries but from the emerging markets.

Therefore, both banks recommend that their clients invest in equities from emerging markets and give them a higher weighting in the portfolio than equities from industrialized countries. Goldman Sachs analysts expect the emerging markets index MSCI Emerging Markets to rise by another 15 percent in 2018. They cite rising corporate profits in China and India as the reason for the increase.

 

3. Sustainable investing is becoming more important

Investing in sustainable companies that pursue a long-term goal instead of just operating from one balance sheet to the next also pays off for investors. This is the conclusion of several studies on impact investing.

"These companies have the greatest price potential due to their current valuation and have a lower risk of loss thanks to the competence of their management and best practices reflected in their strong sustainability performance," says Christopher Greenwald, Head of Sustainable & Impact Investing Research.

Sustainable investments (also called impact investing) will play an increasingly important role in the financial sector. Credit Suisse experts are convinced of this and justify this with the growing importance of young generations. Above all, Millennials "[...] will soon be the dominant generation in the active working population worldwide," according to the Credit Suisse analysts. To them, sustainability plays a decisive role in both consumer goods and financial investments.

 

4. Euro continues an upward trend

2017 was a strong year for the euro. Its value compared to the US dollar and Japanese yen increased considerably. According to the analysts at Goldman Sachs, this upward trend will continue, particularly when compared to the yen. One euro currently costs 132 yen. Goldman believes that the euro will be worth 140 yen by the end of 2018.

The investment bank has two explanations for this: For one, they anticipate that European stocks will continue to rise, while they expect the European Central Bank to gradually move away from its loose monetary policy. On the other hand, Goldman analysts do not foresee an end to the ultra-lax monetary policy in Japan. This, combined with the unresolved demographic problem and the highest global public debt, could put further pressure on the yen.

 

5. Rising demand for industrial metals

2017 was a good year for resources, especially for metals used in industrial production such as copper, cobalt, and lithium. The price of cobalt more than doubled within one year, increasing from 33 euro per kilogram to 82 euro (+256%) per kilogram. The price of copper went up from about 5.75 dollar to 6.53 dollar (+13%) per kilogram.

Both Goldman Sachs and Credit Suisse forecast solid global economic growth in 2018. This means that the demand for these metals should continue to be strong. To profit from this, the investment bank recommends investing in currencies from countries that produce these metals. Examples of these countries are Brazil, Chile, and Peru.

 

 

1. Interest rate increase in the USA dampens economic growth

This much is clear: The issuing bank of the USA, the Federal Reserve, will incrementally depart from its ultra-lax monetary policy. At the beginning of February, Janet Yellen resigned as chairman and her successor Jerome Powell is continuing this course. The first meeting of the Fed was scheduled for March 20, at which an increase in the key interest rate was expected. Three additional meetings will follow on 12 June, 25 September, and 18 December.

Many participants on the financial market seem to expect that the Fed will only raise the interest once. The analysts at Goldman Sachs disagree. They anticipate that the Fed will announce an interest increase at each of their four meetings. This would result in a drop in prices for US-government bonds, marking the end of the “cheap money era.”

The cost of capital would rise again after years of low-interest rates. This would have an impact on the prices of almost all financial products. It is uncertain how the stock market would react to such a move. According to Goldman analysts, traders have not factored in a rapid interest rate hike and may be taken by surprise.

 

2. Corporate debt in China reaches a critical level

China plays a very important role in the global economy. The Chinese economy is the second largest in the world after the US economy and accounts for around 15 percent of global economic output, according to the World Economic Forum (WEF). It is hardly surprising, therefore, that the participants in the financial market pay close attention to it. The level of corporate debt in China is a particularly interesting figure to Western financial analysts.

China's economy has benefited from the recovery of the global economy in the form of rising exports over the last year and a half. To finance growth, Chinese companies have accumulated high debts. Due to the low-interest rates, these debts were often incurred in dollars. This could become a problem for China's economy and thus also for the global economy when interest rates rise again at the latest.

“The main problem is that corporate debt is too high,” warned Chinese central bank head Zhou Xiaochuan at a symposium in Washington in November 2017. China's political leadership wants to reduce corporate debt levels, which will put pressure on the Chinese bond market. Ultimately, it will become clear whether they are prepared to let some heavily indebted companies go bankrupt to solve the problem in the long term.

 

3. The US immigration policy stifles innovation

US President Donald Trump wants to tighten the US immigration policy. The technology sector in the USA could be affected by this the most. Silicon Valley companies currently source most of their labor from countries that would be affected by the new visa regime (H-1B visas). Byron Deeter, manager of venture capital firm Bessemer Venture Partners, warns of the consequences.

“The data shows that 51% of companies in the technology sector with a market capitalization of over one billion dollars were founded with at least one founder with an immigrant background. If you slow this down or start limiting immigration, there will be catastrophic effects on the innovation economy,” Deeter told Fortune.

 

4. Investors’ negligence

When stock markets continue to rise with extraordinary resilience, as in recent years, investors tend to become careless. They risk following the masses to avoid missing the upswing in the stock market. Investments in passive exchange-traded funds (ETFs) tend to increase, while risk perception tends to decline until an inevitable correction occurs.

After the last financial crisis, the US stock market has been driven by the monetary policy of the central banks. If the stock market continues to rise until the summer, it will be the longest rally in history. Savita Subramanian, Managing Director of Bank of America Merrill Lynch, also sees this as a warning signal.

"It feels kind of unsettling. By next July, if the market continues to rise, we will officially be the longest bull market in history, according to technical definitions. It doesn't feel good to buy shares now," Subramanian told Fortune. Or in the words of Warren Buffett: "Be afraid when others are greedy. And be greedy when others are afraid."

 

5. Geopolitical risks

At the beginning of last year, investors were still very sensitive to geopolitical risks due to the US election and Brexit. During the course of the year, however, the stock market appeared unimpressed by such risks. Despite increased tension on the Korean peninsula, stock prices rose to new all-time highs. However, the geopolitical risks remain and investors should keep an eye on them.

Among the biggest are the strained relations between the US and North Korea, the tense situation in the Middle East and the unpredictability of US President Donald Trump. To Byron Deeter of Bessemer Venture Partners, the US president poses several risks to the stock market. "In my opinion, he is the biggest geopolitical risk, both in terms of tax and immigration policy [...] and on international political stability," Deeter told Fortune.

Ian Bremmer, founder of the think tank Eurasia Group, which specializes in advising on political risks, sees another danger. "The market also underestimates the likelihood of a major cyber-attack on a large country's critical infrastructure. That is not factored in although it is a much higher risk than it used to be – more than an actual outbreak of war in North Korea."

 

 

What do you think will be the investment trends of 2018? Let us know in the comments below!

Status as of 26.01.2018 00:00


 

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