Our market looks set to end the year with a bang on the back of merger and acquisition activity and the fact that equities are arguably the most attractive investment option, even as some experts are warning that stocks are starting to look a little stretched.
Is it time to take profit and rotate into other forms of investment in the new year?
I don't think so as 2018 will be the year for equities.
I am bullish on equities on a relative basis as it looks like the most attractive major asset class over the next 6 to 12 months when compared to property or fixed income. By "major" I am excluding more exotic options like Bitcoin and cobalt.
Investors have often compared residential property to shares and the latest data suggests that property prices have peaked while most market forecasts are tipping further gains for our share market in 2018.
Bonds are also out of favour in a rising interest rate environment while the Reserve Bank of Australia's (RBA) tread lightly approach to rates means cash is likely to continue to underperform next year.
It strikes me that capital flows will favour equities (ignoring international markets) and we are likely to see investors channel more of their cash into the share market.
Another strong tailwind I am expecting is merger and acquisition (M&A) activity.
We have already seen a few mega deals with the takeover of Westfield Corp Ltd (ASX: WFD) and Aconex Ltd (ASX: ACX) by large offshore suitors. I am expecting mega M&A to be a big theme for our market in 2018.
If there is a time to rotate out of equities, I suspect it will be 2019 when rate rises become more aggressive as stock valuations get stretched even further. But we can worry about that as we approach the second half of next year.
In the meantime, the next six months at least will be a stock pickers paradise and I believe it won't be difficult for discerning investors to generate a 9%-10% total return without the need to move up the risk curve to buy smaller cap stocks.
From that perspective, I think our miners look well placed to run ahead in 2018 especially given the stubbornly high iron ore price that surged 3.7% to US$74.10 a tonne overnight, according to the Metals Bulletin.
By extension, mining services companies are also well placed for next year even though many have already seen marked increases to their share price.
Another sector I am overweight on is large cap industrials with significant overseas exposure, particularly the US where tax cuts are likely to provide a nice uplift to profits.
Tech stocks are also tipped to enjoy a big 2018 and the experts at the Motely Fool are particularly bullish on one segment of this sector. You can find out what this is and how best to gain exposure to this thematic in a free report that is available by clicking on the link below.
