The past 12 months have provided investors with different types of challenges than in preceding years, with markets reacting – or failing to react – to the impact of bigger themes that emerged during the course of 2016.
Markets continued to climb higher, shrugging off some of the uncertainty caused by unpredictable US president Donald Trump and ongoing Brexit negotiations between the UK government and the EU.
Outside of the UK, more positive sentiment was translated into strong growth for markets during 2017, as the below chart shows.
Performance of major indices YTD
Source: FE Analytics
With a potentially fraught year now behind us, below we look at the forecasts from some of the industry’s best-known fund managers and pick out some of the trends they expect to see in the new year.
Alexander Darwall: This is a period of change
Jupiter’s Alexander Darwall (pictured) said markets are currently undergoing a period of change as the post-global financial crisis period – dominated by ultra-loose monetary policy – comes to an end. 
“It seems unlikely to us that the exceptionally benign investment conditions seen in recent years – particularly low interest rates – will persist for much longer,” said the FE Alpha Manager.
“Policymakers have signalled that interest rates will have to rise as inflationary pressures increase.
“Further, the evident tensions in the west between capital and labour are likely to lead to less business-friendly policies.”
But Darwall, head of strategy for European growth at Jupiter and manager of the five FE Crown-rated Jupiter European Growth fund, said he was not pessimistic about opportunities in 2018.
He explained: “Yet this is a period of change and we believe change leads to opportunities.”
Indeed, Darwall said he is continuing to focus on companies that operate in a favourable industry landscape and with robust business models.
“Where these companies compete and succeed on the world stage the rewards can be commensurately greater. There is no doubt that new opportunities will present themselves and we are confident that our investment process remains appropriate,” he added.
Mark Barnett: Sterling crucial for confidence
FE Alpha Manager Mark Barnett, head of UK equities at Invesco Perpetual, said the domestic market has become “incapable of looking beyond the uncertainty of the Brexit negotiations when it comes to valuing sterling assets”.
Barnett – who manages the Invesco Perpetual UK Strategic Income, Invesco Perpetual High Income and Invesco Perpetual Income funds – said sterling assets were currently trading at “heavily discounted”.
Performance of sterling vs euro since EU referendum
Source: FE Analytics
“Sterling will continue to be a bellwether for confidence in the outlook for the UK economy,” said Barnett. “Since the EU referendum, economic growth has generally proven to be stronger than expected, prompting sterling to strengthen against global currencies.
“However, the pound continues to trade well below purchasing power parity, presenting, in my opinion, considerable upside potential in the performance of domestic-facing companies, while further expanding disposable incomes.”
As such, Barnett said a bearish outlook had already been reflected in domestic share prices and would be approaching the market with some caution.
“Against a backdrop of continued geopolitical uncertainty both in the UK and globally, I will be proceeding cautiously, employing a well-tested investment process based on fundamental company analysis and a pragmatic approach to valuation,” he added.
“The UK market continues to present the long-term investor with opportunities for profitable investment in companies that have the potential to deliver a sustainable flow of dividend income, which can help protect capital in the event of more volatile market conditions.”
Jim Leaviss: The year of the great QE taper
A decade since the global financial crisis, synchronised global growth has become a reality and the end of ultra-loose monetary policy has become a reality, said M&G head of retail fixed interest Jim Leaviss (pictured). 
“There has been much excitement in recent months about the robust and broad-based nature of global economic growth,” he said. “However, this is not to gloss over the risks that remain.
“Chief among these is inflation – or the lack thereof. With the notable exception of the UK, where sterling post-Brexit referendum weakness has pushed the consumer prices index as high as 3 per cent in recent months, there have been more column inches devoted to softening than hardening inflation trends.”
However, despite the lack of inflation – particularly in the US – central banks are likely to push on with rate tightening, the manager said.
“Despite the solid performance of the US economy, inflation there has remained weak,” he said. “Indeed, outgoing US Federal Reserve chair Janet Yellen has described 2017’s low inflation as a mystery.”
“Bond investors are split into two camps: does this weakness reflect temporary factors, or is there something more structural going on?
“If it is the latter, the Federal Reserve should be worried as there is little that monetary policy can do to combat deflationary forces like globalisation, demographics and technology improvements.”
Leaviss said arguments suggesting that recent low inflation numbers reflected transitory factors positive supply-side developments were valid.
“I expect the Federal Open Market Committee under new chairman Jerome Powell to continue to normalise rates gradually in 2018,” he said.
Additionally, Leaviss said 2018 would be “the year of the great QE taper” as quantitative easing programmes began to be wound down.
“After years of shrinkage in net G3 government bond supply (net of central bank QE purchases), QE tapering by both the Fed and the European Central Bank means that 2018 will likely see more sellers than buyers of G3 government bonds,” he said.
“The implications are clear: the days of record low government bond yields may well be behind us. If QE reduced government bond yields on the way in, the opposite may well prove true on the way out.”
Alex Wright: More volatility would be helpful
A continuation of strong market conditions and clarity over the UK government’s Brexit policy are two things that FE Alpha Manager Alex Wright (pictured) thinks would be helpful for domestic investors in his Christmas wisshes for 2018.
“What I would look for in 2018 first of all really is a continuation of the strong equity returns we’ve seen over the last 10 years,” he said. “At around 10 per cent per annum, that is well above historical averages and a continuation of that in 2018 would be a great result for investors.”
However, the manager said that a further 10 per cent rise for the equity market in 2018 was unlikely.
The manager of the four FE Crown-rated Fidelity Special Situations fund, which invests in unloved and out-of-favour companies entering a period of positive change, said greater levels of volatility in the market could throw up more valuation opportunities “which are more difficult to find if markets are trending upwards more steadily as they have been over the past year”.
However, he was wary of making price predictions in the year ahead as concerns over a bubble in share price valuations grow.
“It’s always difficult to predict prices in advance, but I think one of the big surprises of 2017 was the doubling of interest rates that we saw in November,” he said. “I think that could have profound implications for the leadership of equity markets going forward in 2018.
“We’ve seen 10 years, post-financial crisis, driven by [consumer] staples and other steady businesses and that would be of particular benefit to my fund given I don’t have any ownership in this area.”