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Beware of excessive euphoria

An eventful year lies behind us. There have been plenty of political surprises. In France and Austria, extremely young heads of government were elected. The government in Germany is yet to be formed. People in China have even less say in their country's future than before. Meanwhile, many Catalans voted for independence, and the presidential election in the United States is being investigated by a special counsel. Oh, and the leaders of the United States and North Korea have been exchanging insults and military threats.

Markets have remained quite unfazed by all these developments. This time around, investor serenity cannot be solely attributed to the sedative effect of monetary policy. Globally robust economic data has helped as well. Sentiment among companies and consumers has reached long-term highs, and markets have been rewarding this. Shortly before the end of the year, the MSCI AC World Index has achieved a total return of 20%. Some technology giants have even managed to double their value in 2017. A $100 billion takeover deal in the semiconductor industry is in the making. Bitcoin saw a ten-fold surge in value; an oil painting sold for $450 million. Such events are often taken as signs of overheated markets and are sometimes claimed to be turning points. However, there have been quite a few of such "turning points" over the past couple of years. As yet, the naysayers have always been proven wrong by this long-lasting economic cycle.

We are very confident about the world economy as we head into next year. Does this mean that we expect markets to be just as strong as in 2017? No, it doesn't. First, we have to take a look at 2019 to establish our outlook for the end of 2018. Regardless of the inflation and growth environment at that time, central-bank policy is likely to have become more unpredictable by then, not least because of new leadership. Second, markets trade on changes in expectations. At the moment, company, consumer and investor expectations are very high. They can hardly get any higher. Moreover, many portfolios already have similar allocations skewed towards riskier assets. We therefore expect the danger of temporary setbacks to be greater in 2018 than in 2017. Based on our economic and market outlook, however, we would use setbacks as an entry opportunity.

" We are confident about the world economy in the year to come. However, markets trade on expectations. And investors are already expecting a lot. "

Stefan Kreuzkamp, Chief Investment Officer

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