Only high levels of company debt give cause for pause as New Zealand heads into 2018.

It has been a wonderful year for markets - carried higher on the back of rosy economic growth which, for the first time since the Global Financial Crisis, is showing coordinated strength all around the world.

Most investors are enjoying looking at their KiwiSaver balance or investment portfolios – both of which will look much healthier than at the start of 2017.

However, those of us who have been around for a few years know that, while we always enjoy strong markets, there is always a question about whether they can continue. One of the things we use to consider that question is our "traffic light indicator," an assessment of the risks that typically point to market downturns.

The good news is: Right now, most potential risks that typically point to corrections are not particularly evident in the markets. In fact, we see plenty of green lights supporting continued healthy returns.


There is only one key red light on the horizon which, while it is something we continue to monitor, is unlikely to be enough to derail the strong run on markets into 2018.

That is the level of debt companies have right now. This is very high by historical standards. While this is of some concern, it is a logical outcome of the very low interest rates experienced since the GFC.

Companies have taken advantage of this by borrowing money at low interest rates and buying back their own shares. This has been good for shareholders but could go awry if for some reason company earnings come under pressure or interest rates rise dramatically.

There are some things flashing amber on our traffic light indicator. We are watching closely to see if conditions deteriorate further but, for now, they would not stop us being comfortable owning shares.

Top of the list of these concerns are equity valuations (which are stretched), the fact interest rates look to have bottomed out and that investors, on the whole, seem too complacent.

Complacency manifests itself in many ways, including a lack of market volatility, which could signal investors' willingness to take on more risk.

The reason we remain comfortable with the outlook for shares is many of the typical indicators of market stress are just not flashing any warnings whatsoever.

There are plenty of green lights: inflation is well and truly under control, economic momentum is strong, company profits are growing and wage demands are modest and not impacting profit margins. These measures all suggest a healthy outlook for 2018.

While our traffic light risk indicator is no guarantee that markets will behave next year, I certainly have confidence I can tackle my Christmas dinner without worrying about a financial market hangover from 2017.

Now I just need to avoid eating too much...