2017 was a year of political uncertainties and upheavals that were accompanied by a worldwide economic recovery. Real interest rates remained low or rather negative in the euro area case. Among asset classes, stocks were most attractive in 2017 when ignoring the crypto currencies (since they are too controversial to define them as an asset class at all).
Evaluating the outlook in 2018 proves to be more complicated since interest rates will eventually be adjusted to the ongoing economic revival in Europe. Regarding stocks, a surprisingly stronger euro adversely affects European markets. The erratic policies in the US and the objective of a weaker Dollar have weighed on the US-currency. Additional uncertainties relate to the tax reform in the US that raises concern about the competitiveness of European companies, which may to some extent be eroded. In the year ahead, geopolitical risks and protectionist tendencies are further elements of uncertainty, where the repeated threats of punitive tariffs in the US is one example. In this context, the ongoing BREXT-negotiations give rise to further uncertainty which, however, will probably affect the British economy far more than the remaining EU. Risks that could undermine the cohesiveness of the euro area may also arise with the elections in Italy and the forming of a government in Germany. In the upcoming weeks those factors could become less relevant however.
Despite those uncertainties, companies may profit from strong demand and growth potential resulting in higher stock prices. Many companies use rising profits for repurchases of own shares and/or heightened dividend payments. By now, real interest rates are still very low. The general requirements for a favorable year on the Austrian stock markets and its European counterparts are in place.
The disbursements either through repurchases or dividends could however come at the expense of later years. The tax reform in the USA leads to anticipatory effects. Monetary policy in Europe lags the already advanced economic cycle, which could result in a more dynamic future development of interest rates than what would be anticipated when pursuing a gradual exit strategy. This year, a more differentiated share price development is therefore expected. Thus, considerate analysis and diversification are now more important than ever.
Author:
Uta Pock
Head of Research
VOLKSBANK WIEN AG
1 March 2018
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.