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Abu Dhabi, UAEWednesday 12 December 2018

Money year in review: Despite doom predictions, the upward trajectory continues

Investors shrugged off a host of geopolitical and economic worries

From bitcoin to the currencies, and stock markets to equities, it turned out to be a pretty good year . Dado Ruvic/Illustration/Reuters
From bitcoin to the currencies, and stock markets to equities, it turned out to be a pretty good year . Dado Ruvic/Illustration/Reuters

In the year 2017, almost everything continued to go upwards, defying the doomsayers once again.

Global stock markets put on a great show, delivering double-digit returns almost everywhere except in the Middle East.

The bond market held its own, property prices continued to climb and the oil price hit a two-year high, but there was no question about the year’s star performer, bitcoin, whose price soared sixteen-fold and triggered a global mania for cryptocurrencies.

Investors shrugged off a host of geopolitical and economic worries, including the nuclear stand-off with North Korea, concerns over the contents of the US president Donald Trump’s next tweet, a China crash and continuing turmoil in the Middle East.

Some will say that this is only storing up the trouble for 2018, others say the world is well placed for further growth. Almost everybody agrees that bitcoin is a bubble with the price topping US$18,000 in December, but nobody has any idea whether it will crash back to $1,000 or fly to $1 million.

We live in interesting times, and 2018 could be a showstopper.

Equities

Stock markets did even better in 2017 than in 2016, and 2016 was pretty good.

The US MSCI rose 18.02 per cent but was beaten by Europe, which returned 19.55 per cent, with Austria notching up an incredible 49 per cent growth.

Olly Russ, the head of European income at Liontrust Asset Management, says Europe started 2017 nervously following the Brexit vote shock and the rise of the populists in France, Holland and Germany. “We always felt this was overdone and investor sentiment improved noticeably following Emmanuel Macron’s French presidential victory in May.”

Mr Russ sees a bright future as the eurozone economy booms and the political outlook becomes more stable. “European stars appear to be in a rare alignment with politics, economics and earnings, all favourable.”

Nobody would describe the United Kingdom as stable right now, amid Brexit turmoil, a slowing economy and stagnant wage growth, but markets still grew 11.61 per cent this year, as measured by MSCI.

Laith Khalaf, a senior analyst at Hargreaves Lansdown, says investors remain sceptical. “This is due to the current cocktail of political and economic uncertainty, combined with a stock market which is perceived to be propped up by a weak currency and loose monetary policy.”

US stocks repeatedly broke all-time highs driven by the so-called FANG technology stocks, Facebook, Amazon, Netflix and Google-parent Alibaba.

Russ Mould, an investment director at the online investment platform AJ Bell, says US financial markets have broken countless records but now look overvalued and vulnerable. “The US stock market has only ever been this expensive three times in its history, in 1929, 1999 and 2007. All of those episodes ended with a bang, so investors need to be on their guard.”

Emerging markets were this year’s stand-out performer, as they shook off five years in the doldrums to rise an incredible 29 per cent.

Brazil, Russia, India and China returned to form by collectively growing 34 per cent year-to-date. China is leading at 46 per cent.

Maarten-Jan Bakkum, a senior strategist, emerging markets at the fund manager NN Investment Partners, says two years ago China was seen as the biggest risk to the world economy but this has now reversed.

“China has managed to maintain growth and reduce economic imbalances, as the authorities have taken back control.”

The excitement did not extend to the Middle East with the UAE market falling 1.5 per cent, while Oman fell 15 per cent and Qatar took the biggest hit of all, dropping 24 per cent. Saudi Arabia rose a meagre 1.7 per cent.

The rising oil price may help support the region with Brent crude up 20 per cent this year to hit a two-year high of $65 a barrel in December.

However, Fawad Razaqzada, a technical analyst at Forex.com, warns it could struggle to go much higher as US shale producers ramp up output. “Oil will struggle to top $65 to $70, although the fundamental picture is a lot healthier than a few years ago.”

Sam Instone, the founder and chief executive of AES International in Dubai, says 2017 has been an “extraordinary” year for riskier assets such as stocks and shares. “We do not expect current growth rates to continue. It does, however, underpin the strength of the corporate world.”

He says investors should avoid following the crowd and chasing last year’s stock market winners and instead build a well-diversified portfolio of low-cost index-tracking exchange traded funds. “Invest regular monthly sums and avoid trying to time the market, because nobody knows where it will go next.”

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Read more from Harvey Jones:

The 12 top mutual funds to buy now

The return of active has been helped by the pitfalls of passive

Is it still too risky to invest in banking stocks?

The ultimate buy and hold stocks portfolio - if you are brave enough

A guide to bond funds - what they are and who needs them

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Bond markets

Analysts have repeatedly warned of a 30-year bond bubble after several decades of falling interest rates, but once again it failed to burst in 2017.

Global bonds returned 3.4 per in 2017, according to Trustnet.com, while global emerging market bonds did better, growing 7 per cent.

Mr Instone says the bond market is holding steady but growth rates are slowing and they remain vulnerable to rising global interest rates. “Bonds pay a fixed rate of interest and this becomes less attractive as rates rise, as is now happening, with the US Federal Reserve hiking rates for the third time this year in December.”

Claudia Calich, the manager of the M&G Emerging Markets Bond Fund, says emerging market bonds delivered strong performance in 2017. “The markets offer higher yields than developed market bonds and should be able to withstand a slow and gradual tightening path from the Fed.”

Chris Iggo, the chief investment officer for fixed income at AXA Investment Managers, says rising inflation and interest rates are a threat. “The last bull market trade is now rapidly playing out.”

Cash

But 2017 was another dismal year for savers, as rising interest rates failed to convert into more generous savings rates.

At time of writing the HSBC Premier Savings Account pays just 0.1 per cent and the Standard Chartered Bonus Savings Account pays 0.2 per cent, although the HSBC eSaver did pay 1.1 per cent, according to a search on the comparison site Souqalmal.com.

Tom Anderson, a chartered wealth manager at the independent financial advisers Killik, who advises clients in Dubai, says rising interest rates might convert into better savings rates, but there is a downside. “The big story next year could the return of inflation, which would erode the value of cash in real terms.”

Currencies

The US dollar weakened against most major currencies in 2017, falling 3.5 per cent against the recovering euro to €1.17 at time of writing, and 7.7 per cent against the British pound to £1.33.

The Japanese yen, Russian rouble and Chinese renminbi (yuan) also slipped but the big news was bitcoin, which may not even be a currency at all.

It started the year trading at $998 but flew to more than $18,000 this month and by the time you read this its price could literally be anywhere given its enormous volatility, which has seen it swing up to 40 per cent in a single day.

Bitcoin is either the greatest investment opportunity in history or the greatest bubble, or both. Other cryptocurrencies have put in a similar storming performance, with ethereum rising 85 times from $9.76 to $834 at time of writing, and litecoin from $3.39 to $356, which would have turned a $1,000 investment into more than $105,000, so no wonder people are losing their heads..

Steven Downey, a chartered financial analyst candidate at Holborn Assets in Dubai, says it is fascinating to watch a bubble happening in real-time and the mania has given rise to “Fomo” or fear of missing out. “Nobody knows if bitcoin is a bubble, a future mainstream currency, or something totally different.”

Mr Instone says most ordinary people should resist the temptation to dive into the cryptocurrency maelstrom, especially if they want to sleep at night. "Take it all with a pinch of salt and do not speculate or spend your life constantly worrying about whether it is time to buy or sell.”

Mr Razaqzada says bitcoin has thrashed gold and silver in 2017 but will never replace them. “Bitcoins can be hacked, deleted by mistake or collapse if a better substitute becomes available. In contrast, gold and silver represent physical stores of value which will never go to zero.”

Property

Global house prices continue to rise steadily although there were signs of a slowdown towards the end of the year.

The Knight Frank Global House Price Index, published in December, showed prices rising 5.1 per cent in the year to September, down from 6.3 per cent in the previous quarter.

Prices nonetheless increased year-on-year in almost nine out of 10 countries, so no sign of the bubble bursting yet.

Iceland was the biggest winner, with values rising around 20 per cent, with Hong Kong, the Czech Republic, Malta, Canada, Turkey and Australia also posting double-digit increases.

Rampant Chinese property growth slowed to 6.5 per cent as the authorities tightened lending rules, while Germany and the US both grew 6.2 per cent, with New Zealand up 5.2 per cent, France 3.2 per cent and the UK 2.6 per cent. There were small price falls in Italy, Japan, Singapore, Brazil, Greece and a drop of 5.4 per cent in Saudi Arabia.

Kate Everett-Allen, the head of Knight Frank's international residential research, said the oil-dependent Saudi economy is struggling to gain traction. “Along with the recent introduction of a levy on expatriate workers, this is stifling housing demand.”

In Abu Dhabi, residential sales prices dropped 4.1 per cent year-on-year in the third quarter, according to Cluttons, whose latest figures also show Dubai falling 1.5 per cent.

Faisal Durrani, a partner and the head of research at Cluttons, says 2017 has been a challenging year for the Middle East, primarily due to three-year-old oil price rout. “Markets have also been roiled by conflicts in Yemen and Syria, the Qatari diplomatic crisis, Saudi Arabia’s drive to root out corruption and tensions between Iran and Gulf Arab states.”

Mr Durrani says 2017 concludes three consecutive years of softening residential values in Dubai. “Capital values have now declined by 14 per cent, leaving residential sales prices 30 per cent below their 2008 peak.”

He says residential oversupply remains a concern with nearly 80,000 units scheduled to complete over the next three years. “The growing population should boost demand but the vast majority of new-build property is geared towards the luxury end.”

Regulatory protection

2017 will go down as the year that regulatory change was introduced to protect UAE residents from the mis-selling of expensive and inflexible insurance-based offshore savings plans.

The UAE Insurance Authority (IA) and the Central Bank of the UAE have both issued circulars this year outlining changes to the way savings and investment products are sold in the UAE by financial advisory firms and banks. Both agencies were responding to a raft of complaints from customers over expensive fixed-term investment plans.

While the regulations, which will reduce the fees charged on financial products and boost transparency, are yet to be fully enforced, the Central Bank said in September that 100 clients have had money returned to them by banks thanks to the institution's clampdown.

Nigel Sillitoe, chief executive officer of the consultancy Insight Discovery, says UAE regulators started to show their teeth during 2017.

“This should be a good thing for consumers as both independent financial advisers and bank advisers will soon have to be far more transparent on charges and commissions. Consumers will soon get more protection, which is long overdue.”