Financial Markets 2018 Money Matters Monday 18th December 2017
Investors have enjoyed a very successful year in 2017 with diversified growth portfolios up 13.7 per cent. The period since 2010 has been positive as financial markets have recovered from the global financial crisis of 2008-09.
Does this mean a slump is due in 2018?
Healthy global conditions ahead
Most economists don’t think so. In fact, many are saying co-ordinated global growth is likely in 2018. For example, Russell Investments, a major US fund manager, says it expects global economic conditions to remain healthy in 2018.
The JP Morgan Global Manufacturing PMI which measures activity levels in factories worldwide rose to its highest level in nearly seven years last month.
The US is the world’s largest economy and consumer market. If it does well, then that helps others. Its economy grew at 3.3 per cent per annum in the September Quarter and 2.3 per cent over the last year. Retail sales and consumer confidence are high.
The Federal Reserve raised interest rates for the fifth time this growth cycle. The economy is running close to full employment with unemployment at 4.1 per cent and falling. The Fed expects wage rise claims and inflation to increase and is starting to push on the brakes.
Europe and Asia
The European economy is picking up momentum with growth of 2.6 per cent over the last year. It has higher unemployment and more spare capacity than the US but is likely to accelerate in 2018. The Bank of England and the European Central Bank have seen no need to raise rates yet.
China is continuing to grow at about 6.5 per cent per annum. Still a manufacturer, it is now also becoming a consumer society. It continues to import large volumes of minerals from Australia and is also buying agricultural products, health foods, cosmetics and many other items from us.
The Japanese economy looks to be recovering after many slow years. Japan is still our second largest trading partner. In Asia, the middle class is growing and their increased spending power provides opportunities for Australia.
Shares look to be fully priced, especially in the US. However, this environment should see company profits continue to rise. The very low interest rates also mean few alternatives look attractive.
With asset prices high, short term market corrections are more likely in 2018 but economic conditions should ensure major problems are avoided. Borrowing costs are still low everywhere, a bonus for consumers and businesses.
Australia’s economy grew 2.8 per cent over the last year. With conditions favourable and government infrastructure building in progress, it should improve in 2018, assisting investment returns.
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