Last year was dominated by political surprises, from Brexit to Donald Trump’s electoral victory. However, for investors, the most significant thing is not the results themselves, but that they didn’t cause much market turbulence, says Stephanie Flanders, chief market strategist for Europe and the UK, at JP Morgan Asset Management. In fact, “the headlines were more volatile than the markets”. Investors have taken the political upheaval “in their stride”, with many betting that a weaker pound and the possibility of a stimulus in the US will end up being good for shares.
However, the gains seen last year mean that global stockmarkets now reflect a relatively “rosy” view of future growth, with “good news priced into shares”, especially in the US. In turn, this actually increases the risk of a crash or correction because there is plenty of “potential for reversal” if investors’ hopes go unmet. As a result, she advises being “a bit more cautious” about shares on both side of the Atlantic, although she does feel the UK market represents better value than most, at least in relative terms.
So shares are overpriced, but bonds may not be much better, says Flanders. Falling interest rates have left investors dependent on the capital gains from rising bond prices, instead of the income from the yield. This leaves them vulnerable if the process goes into reverse and rates start to rise. While she doesn’t expect rates to return to historic levels of 4%-5% soon, near-zero levels are unlikely to persist. Other “safe” havens may fare little better – gold also reacts badly to rising rates and cash is vulnerable to inflation. Investors “will need to be creative” to preserve their wealth.