Investors could turn a tasty profit in 2018 due to global growth picking up, tax cuts in the USA and central banks loosening their monetary policies, but despite a bright forecast, some pitfalls are lurking in the shadows.
That’s the view of Nigel Green, the chief executive of one of the world’s largest financial firms for expats.
In a message to investors, he is optimistic for financial markets this year, but whatever happens feels savers should keep investing as history shows the markets only go up in the long term.
“While investors have significant reasons cheerful over the next 12 months, there are also three important headwinds to carefully monitor,” said Green.
“First, inflation has remained remarkably low in recent years, despite falling unemployment in all the major economies. It is possible that 2018 is the year that tight labour markets finally result in wage increases that cause a meaningful rise in inflation. If so, central bankers will have to markedly tighten policy – that’s to say raise rates and/or withdraw quantitative easing. If so, government bonds would weaken but equities would have some protection since they can pass on inflation to the consumer as higher selling prices. Eventually, they will suffer as higher interest rates curb borrowing and investment, and consumption falls in response.
“Second, free trade is under fire.US President Donald Trump does not believe in multilateral trade agreements. He has voiced objections to collective and individual trade agreements, not least that with South Korea, and has in the past threatened 40% tariffs on Chinese imports. Protectionism leads to higher prices and inflation, leading to a sharp fall in Treasury prices, but a rise in yields that will be echoed on global bond markets. Risk assets will fall notably as investors buy into higher bond yields, or shelter in cash or gold.
Investment Advice for 2018 https://t.co/SsXeEJYbge
— Nigel Green (@nigeljgreen) January 3, 2018
“The third reason is China’s economy could slow. As President Xi Jinping re-orientates the economy away from a focus on rapid growth dominated by infrastructure investment and exports, towards services and household consumption, the government could become less willing to prop up failing industries and bankroll leveraged investors. At the same time, an increased focus on state control of the economy risks damaging entrepreneurial confidence. A slowdown in China’s growth would trigger a slowdown in global demand and re-awaken fears of global deflation.”