Investment Bulletin - November 2017

 

What might 2018 hold for global financial markets? The financial markets' low volatility underscores investors' conviction that the current environment of modest growth and tepid inflation is here to stay. We agree with this long-term prognosis but are concerned over expected short-term volatility risks.

 

We believe if, the already tight global labour markets grow tighter, could lead to an upturn in inflation. A wage or inflation spike could produce a market-rattling shock.

 

For 2018 and beyond, our investment outlook is more modest. The current valuations, low volatility, and low interest rates are unlikely to be allies for robust financial market returns over the next five to ten years. In our view, the solution to this challenge is not shiny new objects or aggressive tactical shifts. Rather, the need for investors to remain disciplined and globally diversified, armed with reasonable return expectations and robust strategies.

 

We expect opportunities to be created through the anticipated market confusion and panic. It has served us well in being able to add value through the expertise and service we provide.

 

A brief overview of our economic and investment outlook for 2018

 

1. Economic Growth

We expect economic growth in developed markets to remain moderate in 2018, while strong emerging-market growth should soften a bit.

 

1. Inflation

The growing impact of cyclical factors such as tightening labour markets, stable and broader global growth, and a potential revaluation in commodity prices is likely to push global inflation higher from cyclical lows.

 

1. Monetary policy

The risk of a bounce in wages, when the majority of major economies are close to full employment, may lead markets to price in a more aggressive pace of global monetary policy.

 

1. Investment outlook

Although we are hard-pressed to find compelling evidence of financial bubbles, risk premiums for many asset classes appear slim.

 

Setting the Scene :

 

• The global monetary policy support, started nearly a decade ago is now receding.

   

• We are becoming concerned of a mediocre U.S. economy and corporate earnings supported by strength in the rest of the world.

   

• In Europe, we believe there are tailwinds of robust growth and potentially, favourable politics outweighing the headwinds from the rising euro.

 

• We are becoming more constructive on the Asia-Pacific region.

   

• Japan is firming with gross domestic product (GDP) surprising to the upside, and Australia’s economy is improving.

   

• The main note of caution comes from the tensions around North Korea.

   

• We believe there are potentially more euro upside in 2018 but sceptical of the British pound’s strength and if it can be maintained.

 

Based on our “fair-value” stock valuation metrics, the outlook for global equities has deteriorated a bit. Expected returns for the U.S. stock market are lower than those for international markets, underscoring the benefits of global equity strategies in the face of lower expected returns.

 

What is the outlook for 2018 and beyond?

1. The increasing breadth of the global economic expansion is pointing to a longer lifespan.

 

1. Policy missteps or miscommunications cannot be ruled out. Geopolitical risks also lurk. We see few triggers that could shock markets out of their low-volatility regime reinforced by steady growth.

 

1. Structurally lower yields underpin our positive view on equities and other risk assets.

 

We expect there will be scope for constant shifts through market confusion & fear; to market optimism and exuberance. This, we believe, will be a positive time for our focus, investment philosophy and sensitivity to a changing market environment.

 

This bulletin provides information, it is not advice. Any opinions are given in good faith and may be subject to change without notice. Opinions and information included within this document does not constitute advice.

(If you require personal advice based on your circumstances, please contact me.)