GLOBAL GAINS
Global GDP will expand by 3.7% this year, according to the International Monetary Fund (IMF), up from the 3.2% recorded in 2016 and 3.6% in 2017.
This rise is being supported by an improving oil price, a recovering eurozone and growth in emerging Asia.
One of the exceptions to this trend is the UK. Its economy will only expand by 1.4% this year, the Office for Budget Responsibility believes, lower than its previous 1.6% view.
Rising inflation hitting spending and lower commercial investment linked to uncertainty over the terms of the UK’s divorce from the European Union are to blame for the downward revision.
However, Jones believes that the perceived weakness of the UK economy could be priced in to equities.
There are no such problems globally, if projections are proved correct. “Encouragingly, economic expansion in 2018 should be broader than in recent years, characterised by a solid rise in government and business investment, plus healthy consumer spending,” says Luca Paolini, Pictet Asset Management’s chief strategist.
Aviva Investors senior economist and strategist Michael Grady expects that stronger global growth and modestly higher inflation in advanced economies will provide the backdrop for a positive risk environment, just as they did in 2017.
“Moreover, with the improvement in the global economy and the peak of monetary policy accommodation likely to be behind us, we expect prices to be driven more by underlying fundamentals than at any point in the last decade,” he adds.
The consequences of such monetary tightening will define the investment landscape in 2018, according to Legal & General Investment Management chief investment officer Anton Eser.
“Despite low nominal GDP growth, loose monetary policy has kept volatility low, asset valuations high and structural problems such as poor demographics and high debt at bay,” he says.
Eser warns that low volatility and high asset prices breed complacency. “Populism, disruption and China’s debt are all issues which have been largely tempered by the loose policies,” he added.
“Central bank purchases have crowded out investors, forcing them to choose between zero-yielding deposits or much riskier investments. 2018 is the year this could reverse, the ‘hunt for yield’ trade may begin to fade and investors could face a rude awakening.”
EXPENSIVE DEFENSIVES
US equities are considered expensive by some trading on 26.7 times earnings in early 2018, but some institutional investors believe they can go higher thanks to a weak dollar and tax reforms supporting corporate performance.
However, Paolini says better value can still be found elsewhere. “European, Japanese and EM equities have even better prospects,” he says. “The sun is shining especially brightly for eurozone equities.
“The pace of the region’s economic growth is twice the long-term average, inflation is below target, and the European Central Bank is unwilling to retrench too far from easy money.”
State Street Global Advisors global chief investment officer Rick Lacaille says the slow but steady improvement in global growth coupled with modest inflation provides the macro environment that can lift markets higher.
“Valuations, although extended in some sectors, remain below fair value at current interest rate levels,” he adds. “Japan is arguably the most attractive market, given relatively low interest rates and a weak currency.”
The liquidity a loose central bank policy creates will benefit Japanese equities as will the economy expanding by 1.1% this year caused by higher job figures, wage increases and external demand for products and services.
