As 2018 starts, the scene is set for a positive year for equities. Across Europe, there are clear indicators of continuing economic growth after a very strong 2017.

Eurozone jobs growth and manufacturing orders reached 17-year highs in November 2017, according to data from the Purchasing Managers' Index (PMI). This paves the way for robust economic growth.

At the end of 2016, we hoped that 2017 would bring improved earnings growth. And the corporate sector did not disappoint. Earnings grew sustainably for the first time since the global financial crisis. In 2018, we expect up to 15% further earnings growth, creating a positive environment for equities.

Even the UK, surrounded by uncertainty over the Brexit negotiations, performed reasonably well in 2017. While the country might have slower growth than expected before the Brexit vote, it has not fallen off a cliff as the bears predicted.

Monetary policy will continue to tighten gradually across Europe: quantitative easing will wind down across the eurozone; the UK may raise interest rates, but not so rapidly as to destabilise the economy or the market.

Global economic cycles are more synchronised than ever before. A co-operative and inter-related trading environment is spreading profitable commercial opportunities across international borders.

Political uncertainty

Europe's positive economic backdrop should support equity performance. Political uncertainty poses some problems, but whilst at the start of 2017, the populist trend sweeping across Europe seemed unstoppable, the year has proved that when it comes to politics, nothing is ever certain. Populism has become less popular.

Several political events that could have led to significant economic uncertainty, such as the French and Dutch elections, passed without successes for the populist camp. Conversely, at the start of 2017, Chancellor Angela Merkel's victory in the German elections looked assured, but difficult coalition negotiations have weakened her power base.

Moving into 2018, the political backdrop remains complex. Across Europe, electorates are calling what has been a sustained centrist political path into question. Globalisation and technological innovations are rendering some traditional sectors redundant, while cities, especially financial centres, grow wealthier. In post-industrial areas, voters are expressing their dissatisfaction with the divide in fortunes this is creating.

Germany's populist movement has gained some ground. Merkel's CDU party won a lower share of the vote in the 2017 election. The populist nationalistic party AfD, previously unrepresented in the Bundestag, became the third largest party. It will remain in opposition, and even ranks behind the main opposition party, the SPD. But with stalled coalition talks, the prospect of another general election in 2018 looms large; this at least should break the deadlock.

Populism has also been a factor in Italy, where a general election is set to take place in March 2018. But the anti-establishment Five Star movement looks less dangerous today, as the electoral rules have been changed to make it more difficult for them to form a government. Their rhetoric and positioning has become less extreme and although they have gained support across Italy, (evident in Sicily's November election), their refusal to join a national coalition means they will be sidelined if they win less than 51% of the seats.

Balancing economics and politics

As we enter 2018, the economic backdrop is positive. In 2017, we took heart from an improving political situation (compared to 2016 which saw the twin populist victories of Trump and Brexit) and from recovering economies. Thus far, markets have marched ahead despite a few political surprises; economic growth has been good, inflation is low and earnings growth is coming through.

So, what could disrupt this trajectory? A dramatic political event could stymie economic growth. For instance, a worst-case Brexit scenario could undermine London's status as a global financial centre - potentially a benefit to other European centres, but negative fall-out is possible too.

Cautiously optimistic

As we move into 2018, our investment strategy has not dramatically changed. Many of the betterquality defensive companies have re-rated in response to improving economic conditions. Therefore, the search for good quality but undervalued companies has intensified.

Developed Europe, with its well-governed companies, offers investors the opportunity to generate growth in the year ahead: particularly attractive sectors include industrials, technology and consumer services.

Private companies in Europe are increasingly coming to the market via IPOs. Such companies offer exciting opportunities to selective investors who are prepared to look carefully at each investment case and ensure governance is robust. A healthy level of takeover activity is helping active managers generate good returns too.

Political risk remains a concern, although lower than seen a year or so ago - but with risk comes opportunity. Long-term investors are well-placed to take advantage of discount pricing in times of market volatility. The old investment adage is true: the time to buy is often when others are selling. With Europe's strong economic growth showing few signs of slowing, we enter 2018 with an optimistic mindset.

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