2018 will be another year of growth

House View 12 October 2017

The global economy will likely continue to progress solidly through 2018, writes Mark Rider.

We’ve looked at all the signs and trends, and they’re pointing in the same direction: growth looks set to be sustained throughout next year. And inflation, while lifting, will remain relatively subdued allowing central banks to gradually tighten policy.

Financial conditions across the world are supporting this growth, with low interest rates the main factor. And central banks are expected to be so gradual in how they change their cash rates and reduce their balance sheets that there’ll be limited disruption to investor confidence.

In this environment there seems little reason to doubt that sharemarkets will continue to deliver reasonable returns for at least the first half of 2018.

Global economic risks

Overall, we expect inflation to remain around 2 per cent in the new year, which should be a comfortable level for the US Federal Reserve to raise interest rates gradually, likely once later this year and potentially two more hikes in 2018.

  • As ANZ’s chief investment office has previously noted, inflation is one of the main figures to watch: if there’s any unexpected increase then central banks may be quick to react by lifting rates, adding to consumers’ debt repayments and pushing companies’ earnings growth into the negative.
  • China’s economy also needs to be carefully watched. It’s the wild card in the global economy. It has significant debt and conditions are tightening, and the economy is expected to slow as credit becomes harder to obtain. If there’s a disorderly unwinding there then our dollar could fall and global economic growth will be hit.

And though we’re optimistic about financial conditions into next year, because of the risks outlined above, we’re still holding "neutral", rather than going "overweight" on growth assets such as equities.

Australia is clearly improving

Also, as we’ve pointed out before, the Australian economy is looking better:

  • Increasing employment is reducing risks facing highly indebted households.
  • The Reserve Bank of Australia will begin raising rates next year, alongside other central banks around the world, as the local economy continues to improve.
  • Continuing global growth means investors are likelier to favour ‘riskier’ assets, such as the Aussie.

And so we’ve changed our position on the Australian dollar. The investment office is no longer “underweight” but is now at “benchmark”. In our view, the Australian dollar is still tied to risks of a sharper Chinese slowdown but risks on balance are broadly even, even with solid growth across other economies, so we’ve recommended a "neutral" position.

Investment position at October 2017

Asset class Position relative to benchmark/outlook1
Growth assets Neutral
Australian equities Neutral
International equities Neutral
  - United States Neutral
  - Europe Neutral
  - Japan Neutral
  - emerging markets Neutral
Listed real assets Neutral
Defensive assets Neutral
Fixed income Underweight
  - Australian Neutral
  - New Zealand Neutral
  - International Underweight
Cash3 Overweight
AUD/USD Neutral
NZD/USD Neutral
USD TWI Neutral

1. Equities, fixed income and cash are relative to benchmark. Currencies are relative to an absolute return outlook (short term).
2. Comprises of 50/50 split between GREITs and infrastructure securities.
3. Cash is the balancing asset class.