Equity Markets: Will we see a price rally at the beginning of 2018?

The equity markets did not see any great advances in December. This time most of the year-end rallies took place in September and October, with the major share indices rising by up to seven per cent. Just recently there have been neither positive nor negative forces to give the equity markets a new change in direction. Volatility is at an all-time low.

However, we feel that after the weak December, January and February could be even better months on the stockmarket.

There are several reasons for this. One of these is that many investors will top up existing positions in shares in January. Fiscal 2017 saw very good share price performance (DAX +14%, Euro Stoxx 50 +12%), which usually ends up with existing positions being increased. In our view a stock top-up is the correct decision, as low interest rates provide downside protection for the equity markets, so a correction is unlikely for the time being. At the same time company profits should grow significantly again thanks to a strong global economy in 2018, so the equity market not only appears to have downside protection, but in the course of 2018 we can also expect to see the start of dynamic growth in the direction of 14,000 points for the DAX and 4,000 points for the Euro Stoxx 50.

A further reason for our positive market expectations in the first few weeks of 2018 is ratification of the US tax reform, which should also give the publicly-listed US groups a considerable boost to earnings by eight to ten per cent (we blogged about this on 6 December).

This would therefore leave significantly more scope for price rises in the US stockmarket than previously assumed. We assume that the US lead indices will immediately “process” a large part of the expectations following final ratification and will rise sharply. As a result of this, share indices in Europe are also likely benefit.

A trump card still exists in the shape of “Brexit” or “Exit from Brexit”. If the British backpedal on this (the likelihood of this has risen significantly), the DAX is likely to rise by 300 to 500 points within a short space of time. While Great Britain is of little significance as a market for the DAX companies, the impact on market sentiment would be very positive in the short term.

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