In a statement, Green said he is looking to the year ahead with optimistic caution.
“2017 has been marked by steady and climbing markets. As things currently stand, we can expect this to continue throughout 2018. However, investors need to keep an eye on several key factors over the next 12 months that could increase turbulence,” Green said.
Potential turbulence
Green said there are three “important headwinds” he has identified that investors need to “carefully monitor” in 2018.
The first headwind is inflation, which has remained low in recent years despite falling unemployment in all 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.
“In this scenario, government bonds would weaken but equities would have some protection since they can pass on inflation to the consumer, in higher selling prices. Eventually, though, they too will suffer as higher interest rates curb borrowing and investment, and consumption falls in response,” he said.
Free trade is currently under fire, Green said, as US President Donald Trump does not believe in multilateral agreements and could tear up the North American Free Trade Agreement.
“He has voiced objections to individual trade agreements also, not least that with South Korea, and has in the past threatened 40 per cent tariffs on Chinese imports,” he said.
Green said protectionism leads to higher prices and inflation, leading to a sharp fall in treasury prices that will echoed on global bond markets.
The third cause for concern in 2018, according to Green, is the possibility of China’s economy slowing.
“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,” Green said.
“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,” he said.
Investor optimism
Despite his concerns, Green said there are also significant reasons for investors to be cheerful in 2018.
The first positive sign for investors in 2018 is global GDP growth is speeding up. This growth is fairly evenly balanced, with most major economies growing at an acceptable rate.
“Crucially, China is now growing at a more robust pace than had previously been expected and the Eurozone is enjoying an upturn.
“Strong GDP growth is translating into good corporate earnings growth, which supports share prices”,” Green said.
Interest rates, by historic standards, will also remain low in 2018 Green said.
“Cash will remain an unattractive asset class, and bond yields will continue to be slender. We can expect this to further boost stock market indices.”
The third area for optimism in 2018, Green said, are the recent tax cuts in the US, which he says could help boost the American economy and stock market which, in turn, will positively impact global economic growth and global stocks.
“No-one can accurately predict the future. However, whether it is sustained steadiness or more volatility that lies ahead in 2018, one message should be clear, to keep on investing.
“Why? Because economic history shows that over time, markets go up.”
adkinson@private-capital.com.hk says:
What investors need is a low cost platform, a plan, remain focused, invested and stop worrying about all the things one cannot control.
Nobody should care about GDP, trumps tweets or China slowing or growing, its all noise and nonsense.