2018 Investment Outlook
2018 is starting with global equity markets at record highs and persistently low yields available in fixed income. However, the New Year does not come with the same raft of concerns that greeted the beginning of 2017. The global economy is going from strength to strength, driven by the US but very much supported by the Eurozone and emerging economies. Unemployment in most regions is low and decreasing, and wage growth finally appears to be coming through. Inflation also seems to be making a comeback, giving central banks breathing room to increase interest rates. Global trade is accelerating and commodity prices have risen on the back of increased demand from China.
Politics also appears to be playing a lesser part in investor psychology even though Brexit negotiations are still underway and Donald Trump remains in the White House. Significant progress on US tax reforms and agreements on Brexit red lines have gone a long way to calm nerves on these issues. In the year ahead there are far fewer global political events in the calendar when compared to the last 12 months, and although they ultimately had a minimal impact, the perceived reduction in risks going forward can be powerful.
In the UK, uncertainty is and will remain elevated so long as Brexit negotiations are ongoing. The primary impact of the vote so far has been to push up inflation as a result of the weaker Pound. However, this looks unlikely to have the same impact over the coming year as the currency has strengthened over last 12 months. Many are now anticipating that the negative real wage pressures that were present in 2017 will disappear over the next few quarters and could lead to improving consumer confidence. Nevertheless, business confidence remains under pressure and many long-term investment plans have been placed on hold until greater certainty is available on the potential barriers to trade and changes to regulation.
Monetary policy normalisation is a major theme of 2018 and has been well flagged as such. Three more rate rises from the Federal Reserve and potentially one more from the Bank of England, along with a reduction and removal of extraordinary stimulus measures by the European Central Bank have been highlighted for the coming year. The impact of all of this is difficult to determine although it will be reasonable to expect that the quantity of negatively yielding bonds will reduce significantly. Furthermore, the wider consequences of higher yields on US government bonds may be significant as natural holders of such assets return, coming out of higher risk areas.
Action taken by the Organisation of Petroleum Exporting Countries (OPEC) over the year has meant that the oil market has finally started to rebalance. This, along with supply scares in the North Sea and potential for conflict in the Middle East have pushed the price of oil to the highest level in two and a half years. While this has been a significant benefit to OPEC countries, there is now a strong incentive for US shale oil producers to ramp up production once more. Increasing US oil production will be closely watched over the year as it has substantial implications on the overall supply and demand balance of the market.
Strong investor sentiment is abundant which can in itself be a risk. Markets are vulnerable to any changes in the investment environment in which the global economy fails to meet expectations or unforeseen events present themselves. Furthermore, an awareness of where we are at in the economic cycle is important although predicting its end is notoriously difficult. We believe that lower absolute valuations remain the key driver of higher long-term returns and although less easy to find, opportunities are still available.