The pace of change, whether political, economic or corporate seems to have picked up over the past couple of years and there is every indication that this will continue for the foreseeable future.
Equity markets have benefitted from supportive fiscal and monetary policies, climbing to record highs during 2017. In the US, President Trump’s appointment of Jerome Powell to replace Janet Yellen as Chair of the Federal Reserve was well received. In late October, the European Central Bank decided to extend quantitative easing for longer than expected despite respectable growth and some signs of inflation. At the time the President of the Bundesbank expressed concerns that too much support will have adverse consequences in the longer term, but this was ignored by investors.
Over the decades, we have become used to making decisions based on a western framework. Since the financial crisis, this has become an increasingly risky assumption. The centre of gravity of the global economy is shifting and, as it does, we can see the growing influence of non-western money, where decisions are being made using a different rule book.
In the Far East, North Korea’s missile rattling continues to grab the headlines, while its neighbours go about their business. In China, we have seen President Xi Jinping confirmed in power for the foreseeable future, while managing a transformation of the country’s prospects. The mandate from on high is now for ‘balanced growth’, rather than ‘growth’, which suggests that economic policy will now be directed towards achieving sustainability rather than debt-fuelled growth at any price. It is what the Chinese are good at: combining change with stability. Japan continues its corporate renaissance helped earnings growth and innovation. The market re-rating that we are now seeing seems to be based on much firmer foundations than for decades.
In the Middle East, the long-simmering tension between Saudi Arabia and Iran, the two key players in the region, has recently escalated. In addition Saudi Crown Prince Mohammad bin Salman has locked up senior members of the establishment, disturbing the carefully cultivated equilibrium we have come to expect of the kingdom. The importance of these dramatic developments is that approximately 20 per cent of global oil production is transported through the Persian Gulf which separates Saudi Arabia and Iran. As yet, it seems the markets are prepared to ignore the increased geopolitical risk that these events represent, though this could now more easily change, with real implications for the global economy.
Overall and barring a political shock, the outlook for 2018 can be regarded as positive. The equity bull market which started in 2009 is supported by the fundamentals with equities still attractive relative to other asset classes. Investors remain warily positive.
As we look forward to 2018 with the possibility of higher interest rates and the continuing disruption of established business models by technology, the basics of investment life should not be forgotten: with deposit rates still close to zero, not being invested is bad for your income; innovation creates winners and losers, even if index volatility is low; and, most importantly, long term investment success comes from having the flexibility to meet the challenges of a changing world. And finally, don’t forget to look East.
David Miller is investment director of Quilter Cheviot.
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