The potential outlook for 2018 for those clients investing on the markets to be taken with a pinch of salt:
- The global economy is undergoing the most broad-based cyclical upturn in years. There are little signs of weakness as the inventory cycle is signalling continued demand pressure.
- In view of rising capacity utilisation rates and closing output gaps, inflationary pressures are likely to increase gradually, particularly in the US.
- The US Federal Reserve (Fed) will therefore continue on its path of gradual monetary policy tightening. As there will be slightly more hawks amongst the voting members this year according to the roster of Federal Open Market Committee (FOMC), an accelerated pace of interest-rate hikes may be possible particularly if inflation picks up unexpectedly.
- Meanwhile, speculations about an earlier policy tightening by the European Central Bank (ECB) have risen. However, we expect the ECB to stick to its communicated monetary policy for now.
- Although government bonds have generally trended higher recently, the risk for bond yields remains on the upside given the robust global economy and the reduced central bank purchases.
- The favourable economic background is likely to support corporate earnings. However, global earnings revisions have been positive over the past few months, setting the bar relatively high.
- Overall, the positive economic environment, rising corporate earnings and only a gradual pullback of expansionary monetary policies should continue to support global equity markets for now.