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2018’s top 4 themes for investors to keep an eye on


With global growth finally on an uptrend, and positive economic data coming from many countries around the world, 2018 is shaping up to be an exciting year for investment markets. Senior Economist Diana Mousina shares 4 themes that are likely to drive markets this year.


 
With global growth finally on an uptrend, and positive economic data coming from many countries around the world, 2018 is shaping up to be an exciting year for investment markets. Here are four themes we’ve identified that are likely to drive markets this year.

1. Continuing strength in the global growth profile 

A number of indicators suggest global economic conditions are still very strong, hinting at a cyclical high. Purchasing managers indices are a good example and an indicator for the direction in which growth is heading. In the US, the ISM Manufacturing PMI rose to 59.7 points in December, well into positive territory (any figure over 50 indicates this measure is positive).
 
Recently announced tax cuts are good news for the US economy, which enjoyed strong share market growth last year. Early results from the US corporate reporting season indicates future earnings upgrades can be expected. Consumers also receive tax cuts from early February, which should drive spending and, subsequently, corporate earnings and markets generally. 
 
Nevertheless, there is the potential for a correction in the US market in the next few months because share price growth has been so strong and valuations are looking stretched. As a result, we’re looking for investment opportunities from share markets outside the US.
 
The Chinese economy looks stable and growth has been holding up well, with the economy growing 6.8% year-on-year in the fourth quarter of 2017. This figure looks sustainable into the future.
 
This is partly because the Chinese government is focusing on quality growth, including introducing more environmental protections as well as reigning in imbalances. This may temper growth in the long run, but also effect better long-term economic stability. 
 
Global economic growth is forecast to reach 3.7% this year, on the back of 3.6% growth last year.
 
Much of this activity is expected to come from advanced economies such as the US, the Eurozone and Japan. The strength those economies showed at the end of 2017 should continue this year.

2. Inflation on the rise

Global inflation is also predicted to rise this year after trending flat for many years. This is particularly the case in the US, where higher prices are welcome as the economy continues to recover and pricing power comes back into market as wages growth lifts to support a sustained recovery of economic growth. 
 
It is, however, important inflation does not rise too far too fast and remains around central bank limits. In Australia this is 2% to 3%. In the fourth quarter of 2017, inflation rose to 1.8%, still below the RBA’s target but and indicating rising inflation is not a concern in Australia just now. US inflation also rose to 1.8% in December. The Federal Open Markets Committee targets an inflation rate of 2%, so inflation in the US is also in control.

3. Global monetary policy 

The US Federal Reserve looks to continue raising interest rates, while other major central banks including the European Central Bank and Bank of Japan are expected to keep interest rates unchanged. 
 
The People's Bank of China is trying to reign in some debts issued to corporates, as well as other financial imbalances, and this will determine monetary policy in China this year.
 
So, while this year there is likely to be divergence between the US and other markets on rates, in the future they are likely to start to converge. The ECB may start to lift rates later this year and we expect the Bank of Japan to prepare the market for a rate rise in time. But markets are not concerned about the prospect of higher rates yet.

4. Heightened political risk 

In 2017, there were concerns about political instability at the start of the year in particular about the potential for protectionist US trade policies. That did not eventuate last year and instead the US introduced sweeping tax reform. But there is the prospect of reform to trade policies in the US this year.
 
There's also political risk in Europe with elections this year in Russia, Italy and Sweden, among others. There’s also uncertainty around the German government, with a question mark over which factions may be able to form coalitions. Stability in Germany will help push reforms through the Eurozone. 
 
So, political risks could unnerve markets and are looking more important this year. But overall, positive conditions are expected to continue throughout 2018, unforeseeable events notwithstanding.
Funds related to this article: Dynamic Markets Fund

Navigating the ups and downs of the market cycle. This fund uses dynamic asset allocation to actively adjust the split of investments across asset classes to achieve diversification in response to market changes.

The Fund aims to achieve growth above inflation1 and smooth out the economic cycle over a rolling 5 year basis.

1Consumer Price Index (CPI) - the Reserve Bank of Australia inflation rate, trimmed mean

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