What to watch for in 2018

It's often said making forecasts is a mug's game, but still we try of course. Our ability to contemplate the future separates us from our animal cousins.

Okay, so a chimpanzee with a pin may be better at picking stocks than the average fund manager - and a gorilla scratching his bottom better at timing recessions than the average economist - but that's a reason for humility, not abdication.

I don't see how you can study and invest in companies, read annual reports, and try to make sense of industry trends without at least considering the bigger picture.

Is that retailer enjoying strong sales because of management brilliance, or because the economy is on debt-fuelled bender? Is that profitless bank poorly run, or is it trying to make money in a world of near-zero interest rates?

Personally, I keep treating macroeconomics the same way a fan reads all the sports pages in a newspaper. It provides context and can help set expectations - just don't make the mistake of thinking you can truly predict the future!

In that spirit, here are a few hot topics to keep an eye on as 2018 unfolds.

1. Expect more talk of high valuations

According to most valuation metrics, the US stock market has rarely been more expensive relative to long-term earnings or to company assets. Moreover, American indices have been storming ahead without a serious setback for nearly a year.

It's all made a lot of people fearful about a crash.

US company valuations matter because many of us own a huge slug of American shares in global funds - the US market is about 50% of the global total, by capitalisation - and because keen Fools may have holdings in famous companies like Apple.

There's also an old adage that where the US stock market goes, we follow. UK shares don't look anything like so expensive to me, but I doubt we'd shrug off a big crash on Wall Street.

Is it a reason for caution, especially about US firms? Certainly. But keep in mind US shares have looked expensive for several years now. If you'd sold out earlier, you'd have missed a lot of gains. Perhaps the best approach is temper your expectations and portfolio allocations.

2. Watch the US yield curve, too

The US Federal Reserve is raising interest rates. Again, whatever happens with the almighty dollar reverberates around the world. Particularly worrying is we're seeing a flattening yield curve. This is simply a way to say short-term interest rates are rising faster than long-term rates.

This flattening curve might indicate people are pessimistic about the future - indeed when yield curves have gone from flat to negative, that has historically been a good pre-warning of recession. On the other hand, the signal could be being distorted by cheap money from most other central banks worldwide. Watch this space!

3. Brexit will bark but not bite

The row over the border issues in Ireland - and the deal agreed that unlocked trade talks with the EU - seems to me to have taken a Hard Brexit off the table. Whatever you think about Brexit, closer ties with Europe should be positive for the UK stock market and the important London property market, too.

4. The pound to rally

Not many predicted a rally in the pound in 2017, but that's what we got. A softer Brexit should be good for sterling, so while predicting currency moves is more complex than playing 3D chess, I'd bet on the pound going higher.

5. More strange mergers

We've seen some odd mergers lately - such as Sainsbury taking over Argos, and Disney's merger with 21st Century Fox - that have brought together somewhat unusual bedfellows.

I believe something interesting is going on, which is that winner-takes-all dynamics in media (think Facebook and Netflix) and retail (Amazon) have other firms looking for new kinds of partners to help redefine their position on the value chain.

Much more to come, I feel, in many more industries.

6. Speculation about big tech regulation, and even break-ups

That same dominance of a handful of US tech giants may also prompt regulators to step in.

The European authorities have issued big fines recently against US tech giants, and - perhaps because Europe has few dogs in the game themselves - they seem happy to push back.

In the US, the kerfuffle over meddling in the last Presidential election via Facebook and Twitter has some questioning whether such firms are now just too big (and too ungovernable) for the good of society. Look out for anti-trust talk.

7. Value versus growth

If sentiment turns against the giant growth companies that have led this bull market, it might help value investors get out of their interminable funk. Over the long-term value style investing has a record of beating the market - and even more so more expensive stocks - but that hasn't been the case in this rally.

With growth stocks looking expensive, value needs to play catch up if global shares are to keep heading higher.

8. Professionals to be disappointed

An end of year poll by the Association of Investment Companies found that 69% of professional fund managers think markets will rise next year, with emerging markets and Europe leading the gains.

We might ask if a majority of professionals think that, then wouldn't the contrarian bet be to look at markets they're not so keen on? (Perhaps, for instance, the UK?)

I'm also not wowed by the fact that nearly three-quarters expect the markets to rise (with the other 31% saying they don't know, rather than predicting a crash). Pessimism is usually better mood music for investors when it comes to long-term gains. Optimism tends to already be in the price!

9. Bitcoin and the other cryptocurrencies will crash

For all the big gains investors made last year - especially those who invested outside of the UK - 2017 was the year cryptocurrencies grabbed the public's imagination. I expect that to continue in 2018.

I am not stupid enough to predict where bitcoin will end the year, but I feel confident in saying it will crash at some point. Crashes have been its history for the past half-decade, and moreover we're clearly in mania conditions.

As to whether it falls tomorrow or after doubling or tripling in price, who knows? Equally, don't ask me how fast it will bounce back! Crypto is a fascinating area to watch, but at The Motley Fool we plan to concentrate on looking for great companies trading at attractive prices.

2018... and beyond?

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Disclosure: Owain owns shares in Amazon.