More political turmoil and dysfunction in 2018?
The global economy remains in good health, according to Jupiter’s Independent Funds team, although they see the political situation as far less certain.
Overall they believe that, so long as inflation stays reasonably in check, long-term interest rates should remain low.
The unorthodox policies of central banks have been the story for most of a decade, responding to the global financial crisis and its aftermath by keeping interest rates very low and experimenting with various forms of economic stimulus. The story is likely to be little different in 2018, in our view.
‘we should expect two more increases (in interest rates) over the course of the next year’
The autumn of 2016 was when investors could detect a change in the mood of central banks, and the debate rapidly shifted to when interest rates would start to rise or when stimulus programmes would be scaled back. The US Federal Reserve was ahead of the game, having started to raise interest rates in December 2015, albeit slowly.
The two principal Western economic blocs, the US and the euro zone, have recently given a clear steer as to their plans for monetary policy for the next year: the US Federal Reserve will attempt to reduce the amount of government debt, while simultaneously keeping interest rates creeping upwards.
The European Central Bank has determined that it will halve its asset purchase programme to €30 billion a month, but will extend the programme at least until September 2018 and will leave interest rates alone in the meantime. The Bank of England, having just raised interest rates by a quarter point back to 0.5%, has indicated we should expect two more increases over the course of the next year. The outlook for 2018 can be summed up as follows: so long as inflation stays reasonably in check, expect long-term interest rates to remain low.
A politically uncertain situation
More broadly, the global economy remains in good health. Global economic growth is estimated to have accelerated towards 3.2% in 2017 from 2.6% in 2016, and next year is expected to maintain a similar rate of growth. That helps support companies’ economic and financial prospects, albeit in the UK and US where unemployment is negligible at a little over 4%, economists are keeping a close eye on signs of incipient wage inflation.
China, growing by over 6.5% remains a significant component of the global economic engine.
Politically the situation is less certain, however. In the UK, the Conservative government tries to navigate the icy waters of Brexit and to formulate domestic policy with only a wafer-thin majority in parliament.
Contrary to Theresa May’s intentions when she called that early general election, they are in little position to play hardball with anybody.
‘we shouldn’t assume that the UK has a monopoly on political turmoil and dysfunction’
But we shouldn’t assume that the UK has a monopoly on political turmoil and dysfunction; Italy is still in the hands of a caretaker administration ahead of next year’s general election; Spain is embroiled in its biggest constitutional crisis in a generation with the full ramifications of the Catalan independence referendum still to play out; and at the time of writing, Germany is in political crisis with Mrs Merkel unable to form a government following the Federal election in September.
In the US, by 20th January 2018, Donald Trump will already be a quarter of the way through his first (and only?) term of office without having fulfilled anything of substance among his economic manifesto pledges.
And of course the geopolitical situation remains fragile, particularly the stand-off with North Korea, while simultaneously the Middle East is simmering too as it always does.
So what does this all mean for investors?
2017 has seen stock markets consistently chasing new highs. The economic fundamentals remain sound, in our view, but we are mindful that in some areas of both share and bond markets valuations are looking rather high. The likely actions of central banks in 2018, as mentioned above, are likely to put pressure on bond yields to rise, which will mean that their prices must also fall at the same time.
We noted with interest the recent sale of Salvator Mundi, a rediscovered painting by Leonardo da Vinci, for $450 million. That is by far the largest amount raised for an artwork at auction. It remains to be seen whether that is a case of a fool and his money soon parted – another symptom of high asset price valuations – or an astute buyer looking beyond traditional markets for a good investment!
This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. For definitions please see the glossary at jupiteram.com.
The views expressed are those of the Fund Managers at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.
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