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An optimistic outlook can be held if inflation in the US is well behaved.

  • Friday, June 15, 2018

Jerome Powell Chair of the Federal Reserve

2017 was a year of exceptional equity returns for investors as global growth was synchronised across developed and emerging economies. The combination of both low inflation and low interest rates has been the foundation of strong returns across risk assets.

The recent macro-economic conditions have been described as ‘Goldilocks’ for being ‘neither too hot nor too cold’. There has been simultaneous growth across the world while inflation has remained low, corporate profits have improved, and equity markets have responded.

Many analysts fear that this strong stock market performance has pushed risk assets into overheated territory and are awaiting a correction in values. Others believe it is a result of better corporate fundamentals that should continue in the near term. Looking forward, we need to consider if the ‘Goldilocks’ environment can persist.

The stock market falls of February and March now look to have been no more sinister than the repricing of risk in the form of inflation and trade restrictions. The International Monetary Fund (IMF) is forecasting that 2018 will be the strongest year for growth since 2011. The IMF is concerned that both private and government debt levels are historically high and any expected rise in interest rates from the US Federal Reserve would impact on the cost of borrowing.

Overall we expect the co-ordinated global growth that we enjoyed in 2017 to continue through 2018 but that the rate of growth will slow.

There is a genuine feeling that the world economy is still in a period of expansion. The IMF is predicting growth of around 3.9% in both 2018 and 2019. These figures reflect the strength of leading confidence indicators, low interest rates, globally subdued inflation and US tax reform.

The IMF’s global inflation forecast of 2.5% was increased up from 2.3% at the beginning of the year. This is due to late stage growth which is expected to increase inflation and rising oil prices. US inflation has now hit 2.5% up from 2.1% at the end of 2017, while UK inflation is forecast to fall from the current CPI rate of 2.4%.

The US Federal Reserve is expected to raise interest rates at least three if not four times this year with each rise expected to be 0.25%. The Fed will seek to bring any inflation under control by slowing growth through increasing the cost of money.

Both the Federal Reserve and European Central Bank (ECB) will tighten monetary policy either through interest rate rises or through the unwinding of their asset purchase programme. The levels of dollar liquidity are likely to reduce and act as a brake on global growth. US corporations are likely to repatriate the cash they are holding elsewhere in the world which will also have some impact on liquidity.

The general forecast is for slower growth this year but with some concern over rising inflation.

Overall we expect the co-ordinated global growth that we enjoyed in 2017 to continue through 2018 but that the rate of growth will slow.

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Chris Davies

Chris Davies

Chartered Financial Adviser

Chris is a Chartered Independent Financial Adviser and leads the investment team.

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