Continuing strong economic and earnings growth and still-low inflation should keep overall investment returns favourable but stirring US inflation, the drip feed of Fed rate hikes and a possible increase in political risk are likely to constrain returns and increase volatility after the relative calm of 2017:
- Global shares are due a decent correction and are likely to see more volatility, but they are likely to trend higher and we favour Europe (which remains very cheap) and Japan over the US, which is likely to be constrained by tighter monetary policy and a rising US dollar. Favour global banks and industrials over tech stocks that have had a huge run.
- Emerging markets are likely to underperform if the $US rises as we expect.
- Commodity prices are likely to push higher in response to strong global growth.
- Low yields and capital losses from a gradual rise in bond yields are likely to see low returns from bonds.
The main things to keep an eye on in 2018 are:
- The risks around Trump – the Mueller inquiry and the mid-term elections. We don’t see the Republicans impeaching Trump (unless there is evidence of clear illegality) but he could turn to more populist policies such as a trade war with China, a spat over the South China Sea or a clash with North Korea to boost his support.
- How quickly US inflation turns up – a rapid upswing is not our base case but it would see a more aggressive Fed, more upwards pressure on the $US, which would be negative for US and emerging market shares and a rapid rise in bond yields.
- The Italian election – the anti-Euro Five Star Movement is likely to do well and, even though it’s hard to see them being able to form government, this could cause nervousness;
- Whether China post the Party Congress embarks on a more reform-focussed agenda resulting in a sharp decline in economic growth – unlikely but it’s a risk.
Source:
Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital
