Investment Themes in 2018
How Much Longer Can the Cycle Run?
In 2017, we were positively surprised by global growth, which beat even our above-consensus forecasts for the first time in six years, driven by a synchronized global economic recovery. Inflation looks to have bottomed in 2017 and continues to undershoot expectations, despite tightening labor markets. A combination of long-term headwinds, including aging, slow productivity growth, and globalization, is keeping downward pressure on prices. For 2018, our outlook sees steady global GDP growth of 3.4% with a pickup in both advanced economies (from 2.2% to 2.4%) and emerging markets (from 4.7% to 4.8%). We expect monetary policy to tighten, with seven out of 10 advanced economy central banks raising policy rates this year, albeit very gradually.
However, we suspect that the upside risk to global growth is limited and that expansion may peak in 2018. We are moving into an increasingly mature phase of the business cycle, although we do not expect a major slowdown in 2018. Risks are starting to rise, and they are becoming more skewed to the downside as the business cycle matures and as asset prices have risen.
Financial conditions are likely to become less supportive over the course of the year, and while the net supply of relevant assets should rise by ~$2 trillion by end-2019, we think the direct effect of global tapering on the real economy is limited. However, major asset market corrections could trigger or cause a global slowdown.
We expect the global political risk temperature to remain elevated in 2018, particularly in advanced economies. The current disconnect between the political outlook and economic and financial markets performance is itself a major risk. For inflation, commodity prices, in particular energy, and a more robust Phillips curve dynamic are the main upside risks, while innovation and backward-looking expectation anchoring are the dominant downside risks.
The central question for asset allocators is where we are in the economic cycle and what comes next. Cycles are increasingly mature, particularly in the U.S. Resilience to shocks, is falling, as slack is low, pent-up demand is moderating, and financial vulnerabilities are rising.
On a sector basis, we look at virtual currencies after seeing increased interest from central banks globally around the concept and disruptive potential of central bank– issued virtual currencies, or CBCCs. Many countries are already taking an early interest, and proofs of concept are being explored in countries such as Canada, Singapore, and Sweden. Staying with financials, we look at the Chinese online-marketplace lending industry, which bridges a major gap in China’s financial markets, which have a supply/demand imbalance between borrowers and investors. We estimate the immediately addressable market for online consumer credit providers could be in excess of $500 billion.
China is also an important component to our outlook for the Luxury sector, where demand trends have started to improve since the end of 2016, led by Chinese clientele at home and abroad and a gradual return to normality in European inbound tourist flows post-terrorist demand. Luxury demand has also picked up on the back of synchronized global GDP growth in the luxury sector’s key markets — China, Europe and Japan, in particular. Finally, we look at the global wind market, which is rapidly moving towards a subsidy-free world as the technology improves and the costs fall. The long-term volume outlook for the industry is being helped by new innovations, and the outlook for both onshore and offshore markets is positive.