Strengthening world economies offer hope to investors in 2018
Last year was another in which political bark and bite didn't match up. Dominant themes at the start of this year were protectionism, populism and the move away from globalisation. French elections were seen as just another staging post in the inexorable return of nativist politics. Europe and emerging markets were generally seen as no-go zones by many investors as a result.
In the face of this, European and Asian emerging market equities were two of the stellar performers of the year. A sharp cyclical pick-up in global trade has been an important input into that story. Ironically, this pick-up is in large part down to the strength of US consumption.
None of this is to argue that politics can't be influential. However, looking ahead we need to be wary of the priority many seem to routinely give to political events with regard to investment returns. We are not political strategists and cannot pretend to be able to scent the changes in socio-political direction quicker or better than anyone else.
Looking ahead, central bankers in the US and Europe will rightly remain keen to wean their patients off emergency monetary support. This, alongside an increasingly vibrant world economy, should make life tougher for the bond market in 2018. Rising interest rates across the curve should, in turn, provide a stiffer headwind to equity markets than seen for much of 2017.
The investor community is less obviously gloomy about the economic and political prospects for the world: the health of the global economy has become less debatable as past turbulence in the dollar and oil prices has gradually relaxed its grip on various economic statistics, including corporate earnings. Stock markets are simply pricing the outlook for the world economy more sensibly than they were at the beginning of 2016.
However, even though expectations look closer to reality and bond markets less friendly, we still see stocks continuing to reward investor pluck. The decent earnings growth forecast by surveys, consistent with the increasingly rosy health of the US and global business cycle, is central. Investment is also picking up, suggesting that global demand has become less reliant on the broad shoulders of the developed world consumer. Meanwhile, the emergence of a plausible upside scenario in Europe, distinguished by a more collegiate political backdrop, a healthier banking sector, and even meaningful steps forward in the construction of a credible fiscal and political architecture for the euro, should help continue to drag the whole distribution of outcomes for European risk assets higher.
Of course, not all risks have disappeared, just those that preoccupied many at the beginning of 2017. The primary risk for us now centres on the bond market and monetary policy. Central bankers have a wobbly tight rope to tread, perhaps buffeted by a bond market that has become too used to falling yields.
It may be wrong to assume that the historic bull run in interest rates (where rates have been at record lows for a number of years) ends in benign fashion, as we currently do. There are certainly scenarios where central bankers, still locked in post-financial-crisis firefighting mode, react too slowly to the signs that heat is rising in the world's important economies. To that end, the more resilient hawkishness on display from the world's central bankers in the final stages of 2017 should be a source of reassurance, rather than alarm, as we look into 2018.
Eoghain Murphy is a director at the wealth and investment management division of Barclays in Ireland
Sunday Indo Business