The burning questions investors need to answer

The past year has proved to be an ideal environment for US stock markets, and for global growth. But what will be the drivers of investment decisions in 2018?

Here I lay out a couple of the questions that might shape some of the discussions for the coming year.

Can the US dollar stage a turnaround?

Last year proved to be a poor year for the greenback, with the currency staging its weakest performance since 2003.

This was alongside a backdrop which included three interest rate hikes, a tax reform bill that encourages repatriation of US dollars held overseas, a strengthening US economy, and a soaring stock market.

The justification has been that while the Fed may have been in tightening mode, they were no longer the only players in the room.

Last year also saw the first hike in a decade from the Bank of England, and even the ever-accommodative European Central Bank starting to scale back its stimulus.

However, according to the latest CFTC Commitment of Traders Report, dollar positioning started the year quite short, particularly against the euro, which is the longest it has been since 2007.

Furthermore, the bond market is still only pricing in around two further rate hikes from the Federal Reserve this year, even though Fed projections suggest three.

We also shouldn’t forget the changing composition of the Fed members. The minutes have a slightly hawkish tilt, suggesting an upside to growth.

The second question you need to consider is when will politics and geopolitics start impacting risk aversion?

This year is certainly shaping up to be a tense time politically.

Germany does not yet have a government, and all the polls for Italian elections are pointing to a hung parliament.

Meanwhile, Brexit negotiations are now in phase two, with still very little clarity from the government on what the shape of the final trading arrangement might look like.

This uncertainty clouds investment decisions and is one of the reasons that the Bank of England and the UK statistics office have revised down growth projections.

And in the US, President Donald Trump can tick off passing tax reform from his list of first year achievements, while the discourse has now shifted onto the state of his mental health and the midterm elections, where we could see a possible comeback by the Democrats.

Finally, the threat of the “bigger nuclear button” is still very much in the background.

Investors are also questioning whether FAANGs (Facebook, Apple, Amazon, Netflix, and Alphabet’s Google) can repeat their 50 per cent performance of last year, whether we have witnessed the full extent of “Amazonfication”, and what valuation the Saudi Aramco initial public offering will secure if and when it comes to the market.

And lastly, what cryptocurrency will prove to be the “fairest of them all”? Let’s wait and see.

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