Investors still love equities but ‘market fragility’ could be ahead in the second half of 2018

Key Points
  • "There are clear signs that economic growth is set to accelerate across major regions in the second half of 2018, creating a favorable climate for equities and certain commodities."
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As the second half of the year approaches, investors are looking at what might impact their investments.

From trade issues to political uncertainty and central bank policy, there are a number of factors to assess. Nonetheless, the consensus view suggests that a growth re-acceleration is underway, with profits to be made in the equity market.

"There are clear signs that economic growth is set to accelerate across major regions in the second half of 2018, creating a favorable climate for equities and certain commodities," Michael Strobaek, chief investment officer at Credit Suisse said in a note last week.

Karen Ward, chief market strategist for EMEA at J.P. Morgan Asset Management, expressed a similar opinion.

"Over the second half of the year, we expect some re-acceleration in growth," she said in a note.

Solid growth, better earnings

According to projections from the International Monetary Fund in April, the global economy is set grow 3.9 percent in 2018. In the second half of last year alone, global growth hit 4 percent.

The economic momentum seen mainly at the end of last year has carried into 2018, "translating into robust corporate earnings," Ward said.

By following certain rules, you can manage your portfolio to withstand potential negative impacts of volatility and take advantage of opportunities that volatility can afford.
Michael Nagle | Bloomberg | Getty Images

Data collected from the bank showed that earnings reports beat expectations in all the major markets — Europe, Japan and the U.S. — in the first quarter of 2018.

In theory, this suggests that companies have more money to pay back to investors, thus increasing the attractiveness of the equity market.

'The perfect recipe for systemic risks'

However, there are external factors that require attention when picking stocks. "Investors should remain alert to the potential impact of trade frictions and other political and policy risks," Strobaek, from Credit Suisse added.

Investors have been wary of changes to the status quo in trade following decisions from U.S. President Donald Trump to impose tariffs against allied countries. Europe, Canada and Japan are subject to a 25 percent tariff on steel and 10 percent on aluminium, as the U.S. tries to reduce its trade imbalance with other nations.

But Trump's move has caused jitters in those countries, which are due to impose retaliatory duties against the U.S. too. At the same time, the U.S. has also raised duties for Chinese products and authorities in the world's second-largest economy have responded with the same amount of tariffs.

Federal Reserve Board Chairman Jerome Powell reacts after the two-day meeting of the Federal Open Market Committee on interest-rate policy on June 13, 2018, when it raised its benchmark rate to 1.75% to 2%. If the Fed cuts this week, the rate will return to that level.
Yuri Gripas | Reuters

Political turmoil has also caused market shocks in the first half of the year, mainly in Europe. Concerns that a populist government in Italy could come into place and prompt a break up from the euro zone sent Italian debt yields higher. This had some spill over effects to the rest of the euro zone.

There are also worries about potential market shocks coming from central bankers as they reduce stimulus.

"The combination of political, monetary, financial factors is more worrisome than any of them taken in isolation," Francesco Filia, fund manager at Fasanara Capital told CNBC via email Friday.

Nannette Hechler-Fayd'herbe, head of investment strategy at Credit Suisse, told CNBC via email Friday that given the several risk factors, "the key thing for investors is not to get derailed, by nervousness and political headlines."