Equities had one of their best years in recent history in 2017 - an achievement made even more remarkable in the light of competing interest in traditional and non-traditional assets.
In the non-traditional space, cryptocurrencies soared amid increasing calls for investor caution by regulators around the world. Bitcoin, one of the more prominent cryptocurrencies, started 2017 at around US$1,000 but surged to as high as US$20,000 before easing off to around US$15,000.
Traditional equities markets also experienced a fairly broad-based rally. The year saw gains for most indices, including key ones for the financial, property, minerals and semiconductor sectors, among others.
The S&P 500, for example, touched a record high of 2,695. The MSCI World Index gained about 20 per cent for the year, while the MSCI Asia ex-Japan surged 37 per cent, clearly outperforming most of the other global equities indices.
One interesting trend was the heightened interest in the Internet, semiconductor, electric vehicles, minerals and related industries.
In the Internet sector, several companies were propelled to the more-than-US$500 billion league. This exclusive club of the world's most valuable companies is now predominantly occupied by Internet and tech companies, a clear departure from the trend a decade ago.
Apple heads the list with a market capitalisation of more than US$880 billion, while Alphabet's (Google's parent company) exceeds US$730 billion. This is followed by Amazon at more than US$570 billion and Facebook at more than US$520 billion. Tencent is a shade below US$500 billion.
How much bitcoin started last year at.
How much bitcoin surged to last year before declining.
In line with the tech boom, the Philadelphia Semiconductor index finished 39 per cent up for the year.
Manufacturers of electric vehicles also drew investor interest and companies in this space benefited, along with those in auxiliary industries. Lithium prices rose about 28 per cent in anticipation of an uptick in demand for its use in electric vehicle batteries.
However, after the spectacular double-digit gains in the last 12 months, will the momentum carry over into 2018?
ECONOMIC AND EARNINGS GROWTH OFFER POSITIVES FOR 2018
Based on historical trends, it is rare for a market to record another record-breaking year after a strong 12 months of record gains. For example, markets recovered strongly in 2009 after the global financial crisis, but in 2010, gains were dramatically more subdued.
The S&P 500 surged 23 per cent in 2009 but gains in 2010 moderated to 13 per cent. For Singapore, it was up 64 per cent in 2009 followed by 10 per cent in 2010.
Still, there is room to the upside for global markets in 2018. Economies are now generally quite healthy, and going into the new year, the impact of the United States tax reforms on corporate earnings is likely to be positive.
In addition, the market is expecting about three hikes this year and the Fed Fund rate is likely to end the year at around 2.25 per cent.
For the S&P 500 companies, 2017 earnings-per-share projections moved up sharply from slightly above US$106 at the end of 2016 to about US$134 at the end of last year. In addition, earnings are now projected to grow 10 per cent this year and 10.4 per cent in 2019.
We expect geopolitical tensions surrounding North Korea and the Middle East to remain in 2018, but this will be mitigated by healthy economic and corporate earnings growth. The US economy is projected to enjoy a growth rate of 2.5 per cent in 2018 versus an estimated 2.2 per cent in 2017.
Buoyed by the strong rally in the market, valuations have moved up in tandem. But the rate of increase has been modest as earnings have also moved higher. As an example, the S&P 500 was trading at about 20.9 times at the end of 2016. This has only risen to about 22.5 times - despite the index having surged about 20 per cent in 2017 - largely because of the strong gains in earnings growth.
E-THEMES WILL CONTINUE TO DOMINATE
After the buzz of the past few quarters, heightened interest in Internet stocks is likely to remain a key theme in 2018 as new collaborations and developments relating to e-commerce, payment networks, disruptors, unicorns and other unique services surface on the market.
The Dow Jones Internet Composite Index has already broken through to a new all-time high and gained about 38.5 per cent in 2017. Valuations are higher than average at 25.1 times projected 2019 earnings, but this is also backed by a projected 26 per cent rise in earnings.
In Singapore, the Straits Times Index also fared well, climbing 18 per cent last year. The three local banks performed strongly and enjoyed broad-based growth, and this led to a 30 per cent gain for the Financial Index.
Buoyed by the active transactions in the collective sales market, the Real Estate Index also fared well, up 23 per cent for the year, as the URA Index also posted its first increase after 15 quarters of decline. We expect property stocks to remain in focus this year.
Despite the good gains in 2017, we believe that upside remains.
For Singapore stocks, our picks are CapitaLand, City Developments, DBS, Frasers Centrepoint Trust, Frasers Logistics & Industrial Trust, Keppel Corp, Mapletree Greater China Commercial Trust, Sembcorp Industries, Singtel, UOL, Venture Corp, Wheelock Properties and Wing Tai.
Beyond Singapore's shores, investors poured into the Hong Kong market, which rallied a gravity-defying 35 per cent last year to take its place as the world's top-performing major market. Interest in Hong Kong equities should sustain in 2018, especially among investors seeking exposure to Chinese companies in the tech, shipping, property and other growth sectors.
In Hong Kong, we have buy ratings on China Merchants Port, China State Construction International, Cosco Shipping Ports, CSPC Pharmaceutical, Fosun International, KWG Property and Longfor Properties.
• The writer is head of investment research at OCBC Bank.