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Financial Market Expectations In 2018

12th January 2018 Ben Kumar, Investment Manager, Seven Investment Management

Here we take a look at the prospects for 2018 and what investors can expect from the markets this year with an insight from FBU partners 7IM.

There’s been plenty in the news about what investors can expect from markets in 2018. From what we’ve read, the consensus has been to expect more of the same – and the main story for 2017 was one of increasing confidence in synchronised global growth.

A report released by the UN noted: “roughly two thirds of countries experienced stronger growth in 2017 than the previous year.” 2018 looks similarly positive, with recent estimates for growth rates in the US, the Eurozone, China and Japan being revised up. This has pushed up 2017’s global GDP growth estimate to 3.5% − a level that compares very favourably to 2016’s 2.4% and marks a return to pre-2008 levels – with the optimism being carried forward into as well as 2018’s and beyond.

A world seeing this much growth should also be able to deal better with any short-term wobbles. Rather than just relying on US consumers and the Chinese government, 2018’s global economy looks likely to also be able to see support from Europe, Japan and commodity producers. In addition, the belief in the world’s positive trade cycle is reaffirming and giving confidence to both consumers and businesses.

This point of view translates into an encouraging base case scenario for 2018. Should that outlook prove correct, there is really only one key difference to what we saw last year i.e. wage growth.

This is important because of its impact on interest rate policies by the central banks. If employers focus on capital expenditure and productivity rather than passing on salary increases, it could help keep inflation on a short leash. This would enable interest rates to be raised gradually. This world would be very good for equities, and reasonably benign for fixed income – that is as long as any rate rises can continue to be well signposted by the central banks. 

If the signs of inflation in wages start to show, and also begin to become apparent more broadly in the economy, then we would expect central banks to act and raise interest rates more aggressively. This could, in turn, present challenges for both bonds and equities, as investors begin to get their heads around the end of the 30-year bond bull market.

But what does all this mean for investors?

Here, 7IM is cautiously optimistic about our opportunities in 2018. Our view is more tempered than many of our peers. This ‘glass half full’ outlook partly comes from our approach to managing money – we’re keen to protect our clients’ wealth, as well as ensure that we meet the returns that we’re aiming to deliver – markets can go down after all, as well as up.

Tail risks, i.e. the causes behind any markets’ wobbles, are always present and while we are not focusing on these – that would see us taking a ‘glass half empty’ approach – we are bearing these in mind when we decide in which types of assets we will be investing.

7IM’s portfolios, therefore, are not as heavily invested in equities as some of our peers. That’s because we see that much of the good news on the global economy is already included in equity market prices. Two exceptions to that are the Eurozone – where the good news took longer to take hold than in the US and so stockmarkets only really started picking up last year – and the UK. Here, of course, Brexit has caused some confidence issues in the ability of companies to plan for the future and invest accordingly.

We also have few fixed income investments. Most of our scenario analysis sees interest rates rising steadily over the medium term, and we remain cautious about holding long-dated bonds against this backdrop. 

Instead, we are focusing attention and investments in alternatives investments, such as absolute return funds and infrastructure funds. These provide that all important portfolio diversification that we as multi asset managers deem to be key to long term, consistent performance, and may give protection should those markets wobble in the short term.

Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.

 

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