2018’s rewards likely to outweigh risks – expect decent stock market returns, ongoing low volatility

When America’s economy, currently the world’s largest, is in good health, there is a disproportionately positive knock-on effect for the world economy.

PUBLISHED : Tuesday, 09 January, 2018, 2:35pm
UPDATED : Tuesday, 09 January, 2018, 10:30pm

2018 offers many reasons why investors in global stock markets are likely to be rewarded in the 12 months ahead, with many of the themes that supported share price gains last year persisting.

There are also significant events and policies, however, on the horizon that they should simultaneously eye with caution to avoid potential risks to their portfolios.

Arguably, the most important positive factor for investors is the accelerating global gross domestic product (GDP) growth.

Going into 2018, the global economic landscape is considerably buoyant, with a respectable 3.5 to 4 per cent growth expected within the next 12 months.

The IMF’s current 2018 forecast is 3.6 per cent global GDP growth. Indeed, the world economy is doing better than most previous forecasts and this phenomenon is, I predict, likely to strengthen throughout the year.

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Furthermore, this uptick in global GDP is driven by healthy expansion that is fairly evenly synchronised across developed and emerging economies around the world.

As China continues its impressive transition to a consumer-driven economy, it could also potentially serve as a headwind for investors since the transition is potentially hugely disruptive to the economy as resources are transferred from the construction and heavy industry sectors to the service sector

Importantly, the world’s second largest economy, China, is growing at a stronger pace than had been expected, with it being reported to set its economic growth target at around 6.5 per cent for 2018 – although this has yet to be confirmed by the State Council, China’s cabinet.

Similarly, the euro zone finished 2017 with its strongest growth in almost seven years and is forecast to expand by 2.1 per cent this year.

Even the UK, going through its divorce from the European Union, is predicted to dumbfound some commentators and grow its GDP by 1 per cent.

US President Donald Trump’s highly anticipated tax cuts that were announced in December are another gift to investors through 2018 is.

Even though there remains a question mark over how these will ultimately impact individual sectors, there will be a net beneficial effect on US corporate earnings.

When America’s economy, currently the world’s largest, is in good health, there is a disproportionately positive knock-on effect for the world economy.

Investors will also be rewarded in the year ahead with a boost to stock markets thanks to continuing loosening.

Note: ‘loose’ should be used instead of ‘loosening’ since the Fed is tightening policy, albeit it remains loose by historical standards monetary policies from key central banks, including the Federal Reserve, the Bank of England and the European Central Bank.

Clearly, there are several significant motivators for investor optimism in 2018.

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On the flip side of this, however, there are some challenges that need to be monitored and sidestepped to safeguard, maximise and grow portfolios.

Perhaps the most important of these is inflation. Despite coming from a low starting point, inflation is creeping up everywhere.

There are several significant motivators for investor optimism in 2018

As such, this could be a year in which many central banks feel forced to tighten monetary policy, meaning raising the ultra-low interest rates and/or the pulling back from quantitative easing.

With robust GDP growth, there are some legitimate concerns that monetary policies could be tightened at a quicker pace than the markets have priced in.

Another risk on the horizon is the ongoing trade policy debate in America. The 45th president does not subscribe to the free trade approach and there is a possibility of Nafta, the trilateral trade bloc in North America, ending or being significantly modified.

Should regional free trade be squeezed, global prices and inflation would increase and risk assets, such as equities and non-core government bonds, would come under pressure.

As China continues its impressive transition to a consumer-driven economy, it could also potentially serve as a headwind for investors since the transition is potentially hugely disruptive to the economy as resources are transferred from the construction and heavy industry sectors to the service sector.

A reduction in China’s growth as this takes place would prompt a slow down in global demand as well as concerns of global deflation.

While these are all key risks to be aware of and review, it can be reasonably argued that none of them are really new issues and they did not throw the markets off their upwards trajectory last year.

Whilst no one has a crystal ball, in 2018 the rewards are likely to outweigh risks and investors should expect decent returns for stock markets with ongoing low volatility.

Nigel Green is founder and CEO of deVere Group, the independent international financial consultancy

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