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05 March 2018 laia

Global growth likely but not set in stone for 2018

The markets’ expectation of accelerated global growth should be supportive for risk assets heading into 2018. However, elevated valuations in key markets such as the US, leave them vulnerable to negative surprises. While favourable growth and an increasingly positive sentiment have created an environment of “rational exuberance” as some have described it, complacency has risen. This is indicated by unsustainably low volatility, which at some point will pave the way for increased risk aversion.

The current bull market in US stocks is one of the longest in history, so it is fair to say that we are at an advanced stage in the current cycle. When it will end though, is anyone’s guess. What we do know is that bear markets in equities are usually accompanied by recessions, and the odds of a recession appear low at this stage. What is interesting, is that the US yield curve has been flattening for some time now. An inversion of the curve has historically been a reliable indicator of a slowdown in growth and an associated correction in stocks, so this dynamic will be worth monitoring in 2018.

Other important global developments to bear in mind as the year unfolds include: the delicate path of developed market central bank policy normalisation as we transition from ultra-accommodative policy to a higher interest rate environment; the effect of higher rates on the flow of capital into Emerging Markets through the global search for yield; the UK’s complex engagement with the rest of Europe in negotiating a departure from the European Union; China’s growth trajectory and reforms alongside debt levels that have historically preceded financial crises in other countries in history; and a host of other geopolitical risks across the globe.

In South Africa, new leadership in the ruling party presents hope of an improvement in confidence and investor sentiment needed to spur economic expansion in 2018. While this could be a step in the right direction, there remains a fair amount of work to be done, some of which will require difficult policy decisions to sustainably correct the current economic course.

Whether any of these known factors ultimately create any disruption or opportunity in 2018, remains to be seen. However, experience has shown that it is often the unforeseen ones that tend to have a more significant impact on markets.

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