As we move into 2018, we need to prepare for a subtly changing investment environment. Now is the time for a comprehensive “reality check”. Our new Ten Themes for 2018 can help you understand the opportunities and risks ahead.
“Be prepared, at the very least, for higher levels of volatility”
We think that we will see another year of positive, if generally rather lower, investment returns. But believe that you should be prepared, at the very least, for higher levels of volatility. As we put it: forewarned is forearmed (Theme #1). Our central macroeconomic scenario is that growth gazumps geopolitics (#2) but consider some alternative scenarios too: politics is not the only threat here.
“Even the most gentle withdrawal of policy support will blunt asset class returns”
The central policy story for 2018 will remain central banks in transition (#3). Efforts to wind down quantitative easing (QE) and return monetary policy to a more normal setting will continue. We think that they will be successful. Major asset class reversals will be avoided. But even the most gentle withdrawal of policy support will blunt some asset class returns. For this reason, we would suggest that you, for example, “flashlight” fixed income (#4): light up each sub-sector and take a realistic view of what is possible.
“Still some oxygen for equities, but earnings will be key”
As we tread higher up the investment returns mountain, the potential for reversals increases. Nonetheless, we think that there is still some oxygen for equities (#5), particularly if earnings continue to improve. In particular, we see the potential for further gains in the “new” emerging (EM) Asian equity market (#6). But with returns in conventional assets and asset classes probably lower on average than in 2017, and volatility higher, we think that it could be worthwhile to explore investment alternatives (#7).
“Economic and policy fundamentals may be in conflict with short-term factors”
Market expectations will not always be met. Exchange rates are usually an early casualty of such uncertainty and we would expect dynamic FX drivers in 2018 (#8): economic and policy fundamentals could be in conflict here with short-term factors. By contrast, we expect a strong case of oil déjà vu (#9) – we think that the threat of higher U.S. production will continue to keep a lid on oil prices, as it did in 2017. Finally, we would again focus on technology in tomorrow’s themes today (#10) and this year highlight smart mobility and artificial intelligence (AI).
We support our Ten Themes for 2018 with separate macroeconomic and asset class analysis and forecasts. This should be a year of “growth without tears” but there remain political and policy risks. And for multi-asset investors, the likelihood of lower investment returns may call for both active risk-taking and active risk management. For equities, we believe that continued earnings growth will be key and keep faith in emerging markets. For fixed income, the discussion is focused on likely central bank policy evolution and its implications for government and corporate bonds.
In summary, a year of investment opportunities but you need to tread carefully: time for a “reality check”.