Volatility and the first meaningful lift in inflation coming from the United States will likely be the main differentiating features in global financial markets in 2018 compared to this year, according to Dr Shane Oliver, AMP Capital’s Head of Investment Strategy and Chief Economist.
The dips in share markets experts anticipated in 2017 are more likely to materialise in the new year, Oliver notes.
But with global growth continuing – as emerging market economies begin to join the United States in its growth recovery – these dips could present reasonable buying opportunities for savvy investors, Oliver says.
“The big thing in 2018 will be volatility. Twenty seventeen was a pretty smooth year; 2018 is likely to see a pickup in volatility. Investors should be looking out for corrections as a buying opportunities,” he says
Another big theme in 2018 will be the divergence between US monetary policy and the actions of central banks in Australia and in other countries around the world, Oliver points out.
The US Federal Reserve is likely to hike four times in 2018 and will to continue with quantitative tightening while other central banks including the Reserve Bank of Australia are likely to lag, Oliver points out.
Investment returns across most asset classes were superior in 2017 compared to the previous year, Oliver notes. He points out investors should modify their expectations for returns in the year ahead in 2018.
It’s possible political risks may have more impact in 2018 after a relatively benign 2017, Oliver notes.
US political risk is likely to become more of a focus again with the ‘Mueller inquiry’ continuing and the November mid-term elections playing out, which is likely to see the Republicans cede power in the House of Representatives to the Democrats. This may result the possibility President Trump could resort to populist policies like protectionism to shore up his support, Oliver predicts.
Meanwhile, the Italian election is likely to see the “anti-Euro” movement do well; North Korean risks continue to remain unresolved; and there is also a risk of an early election in Australia, he points out.
“Fortunately, there is still no clear sign of the sort of excesses that drive recessions and deep bear markets in shares; there has been no major global bubble in real estate or business investment; there is the bitcoin mania but not enough people are exposed to that to make it economically significant globally; inflation is unlikely to rise so far that it causes a major problem; share markets are not unambiguously overvalued and global monetary conditions are easy,” Oliver explains.
“So arguably the ‘sweet spot’ remains in place, but it may start to become a bit messier,” he says.
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