Brexit talks progress and Trump tax cuts fuel boom as even fears of war in North Korea, upheaval in Europe and bitcoin bubble fail to dampen spirits

Global stock markets have ended 2017 on record highs, gaining $9tn (£6.7tn) in value over the year due to a strong worldwide economy, President Donald Trump’s tax cuts and central banks’ go-slow approach to easing financial support.

The FTSE 100 hit a new peak in London, with an all-time closing

high of 7687.77, having earlier hit a new all-time peak of 7697.62. The leading UK index was boosted by a late surge in mining stocks as commodity prices rose against a weaker dollar and optimism grew about the Chinese economy, leaving the index up 7.6% over the year.

In global terms, the MSCI all-country world index gained 22% or $9tn on the year to an all-time high of 514.53. Even the rival attractions of bitcoin, up nearly 14 times over the year, and concerns about war with North Korea, political upheaval in Europe with the Catalan separatist movement in Spain and an inconclusive German election failed to dampen the party mood.

Craig James, chief economist at Sydney-based fund manager CommSec, said that of the 73 bourses it tracks globally, all but nine have recorded gains in local currency terms this year. The key for 2018 will be whether central banks maintain a benign approach to reducing their financial support, he added, with the Federal Reserve and Bank of England raising borrowing costs only gradually this year. Low interest rates and quantitative easing, where central banks buy bonds from financial institutions, have been a major support for investors and asset prices in recent years.

“For the outlook, the key issue is whether the low growth rates of prices and wages will continue, thus prompting central banks to remain on the monetary policy sidelines,” said James. “Globalisation and technological change have been influential in keeping inflation low. In short, consumers can buy goods whenever they want and wherever they are.”

President Trump’s political agenda was a key factor for investors in 2017. The US president’s tax bill, which finally passed through Congress in December, fanned hopes that companies would use their windfalls from the changes to expand their businesses or return cash to shareholders. A spate of recent mergers, including Disney’s $66bn move for Rupert Murdoch’s 21st Century Fox, France’s Unibail-Rodamco buying shopping centre specialist Westfield for $25bn and GVC agreeing a deal for Ladbrokes Coral, also helped sentiment.

Facebook Twitter Pinterest Japan’s Nikkei 225 gained 19% in 2017. Photograph: Toru Yamanaka/AFP/Getty Images

Despite the FTSE 100’s latest record, its annual 7.6% increase was dwarfed by the 19% gain recorded by Japan’s Nikkei 225, the 32% rise on the Nasdaq 100, the near 13% jump on Germany’s Dax and the almost 26% boost to the Dow Jones Industrial Average.

Over the year, the FTSE 100 has added £141bn to the value of Britain’s top companies. But it has lagged rivals due to concerns about the increasingly tricky talks on the terms of the UK’s departure from the EU. However, a breakthrough deal on the Irish border and citizens’ rights in December lifted some of that cloud, and nearly 5% of the FTSE 100’s annual gain came in the final month of the year following the Brexit agreement. Its low point of 7093 was in early February, as Trump’s first attempt at a travel ban upset investors.

There were also currency issues for the FTSE 100. A partial recovery in the pound from its post-referendum lows – sterling had fallen by almost 20% at its worst but ended the year down less than 10% – hit the overseas earners which dominate the 100 index, since they benefit from a weaker UK currency.

The mid-cap FTSE 250 index, which contains more domestically focused companies, also outperformed the FTSE 100, climbing more than 14% over the year.

Craig Erlam, senior market analyst at online trading group Oanda, said: “The FTSE 250 started on the back foot at the start of the year compared to the FTSE 100 [due to Brexit concerns], with sentiment towards the UK economy being more pessimistic than it is now. As the year has progressed though, it’s become clear that the economic downturn in the UK has not been as severe as some feared while progress in the negotiations provides hope for domestic stocks, benefiting FTSE 250 companies over the FTSE 100.”

The best performers in the FTSE 100 over the year were NMC Health, which pleased investors with news of its expansion into Saudi Arabia, Worldpay after a merger approach from US payments firm Vanti, and housebuilders Persimmon and Berkeley, which recovered from their post-EU referendum falls.

Facebook Twitter Pinterest The New York Stock Exchange in New York City. Photograph: Drew Angerer/Getty Images

Why stock markets have hit record high

Here are five reasons behind the record-breaking run for global stock markets this year.

Boom in global growth

Almost a decade since the financial crisis sparked economic decline around the world, 2017 was the year when global growth came back with a bang. Failure by rightwing populists to seize power in Europe led to political stability, helping the single currency bloc to recover after years of tumult, while China kept up its rate of expansion despite fears over a sharp slowdown. According to the OECD, global real trade growth accelerated from 2.6% in 2016 to 4.8% this year and world GDP growth jumped from 3.1% in 2016 to 3.6% in 2017.

Loose tax and monetary policy

Markets have received a double boost from low interest rates and tax cuts this year, stimulating demand for shares. Donald Trump’s US corporate tax rate cuts are expected to boost company profits in the world’s largest economy – therefore boosting returns to shareholders. Meanwhile, central banks kept pumping money into the global financial system through quantitative easing. These debt buying programmes have caused a fall in bond yields – the interest rate they pay to investors – which has forced market professionals to hunt for greater returns from riskier assets, with stocks the investment of choice.

Low volatility

Known as Wall Street’s fear gauge, the Chicago Board Options Exchange Volatility Index has fallen to record lows this year – helping to fuel the rally in shares. The gauge measures investor expectations for price swings in the stock market over a 30-day period, up or down. The Vix fell to below 9 points in July and has not gone anywhere near the 20 mark, which typically indicates that things are going awry and is a common feature of falling markets.

Weak pound

In Britain, the FTSE 100, packed with companies that earn much of their profit in foreign currencies, has surged as a result of stronger global growth and the weak pound since the Brexit vote. Although it has staged a recovery this year, sterling is still almost 10% down on the dollar, which benefits companies making money in foreign markets.



Irrational complacency

A general sense of confidence amongst investors over the state of the global economy – and the state of geopolitics – has been key. However, investors may be ignoring problems lying just beneath the surface. The fund manager Alberto Gallo at Algebris Investments thinks there are reasons to be cautious – with risks arising from geopolitics, central bank policy and higher inflation. Markets barely blinked this year, despite faltering Brexit talks and concerns over North Korea’s nuclear weapons programme. Given the rising number of one-sided bets for the market to keep on rising, the risks of a rise in volatility could be growing.

Richard Partington

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