MARKET OUTLOOK

Five trends for financial markets in 2018

Felix Herrmann
Felix Herrmann
Investment Strategist
January 2018

All views in this article are based on the BlackRock Investment Institute Global Investment Outlook 2018.

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

Admittedly, outlining the complex world of financial markets in just five topics is a difficult task. Nevertheless, we have had a go for 2018.

inflation comeback
1. Global growth to remain in autopilot

We are expecting robust, globally diversified growth to continue in 2018. Although we generally see less potential for positive surprises in growth figures than in 2017, we believe that there is also significantly less scope for negative surprises, and recession threats remain low. We do not expect the macroeconomic environment to prevent equities from experiencing another strong year.

inflation
2. Inflation to make a comeback – but only in the US

With higher wages in the US, no more exporting deflation from China and rising commodity prices, it is our view that prices in the US should climb somewhat faster in 2018 than in 2017, despite the downward pressure exerted by a move towards digitalisation and automation. By contrast, we have as yet seen few signs of sustainable price growth in the eurozone.

monetary stimulus
3. Monetary stimulus to become less prevalent

The US Federal Reserve (the Fed), under new leadership, is expected to reduce its balance sheet by not investing all of its returns from bonds that are reaching maturity – the date on which the principal amount of a bond is to be repaid - back into the bond markets. From January 2018 onwards, the European Central Bank (ECB) has said it will only purchase bonds with a total value of €30 billion rather than €60 billion and whilst the Bank of Japan (BOJ) is set to continue its asset purchasing into 2018, we believe it too is tentatively starting to contemplate easing its currently ultra-expansive monetary policy.

Although the bottom line is that major central banks will likely continue to supply the financial markets with liquidity in 2018, the gradual decline in this growth should gradually see markets become self-sufficient again. Interest rates generally remain extremely low, but on an upward trajectory nonetheless.

reduced reward
4. Reduced reward for risk

It was a near-perfect year for risk assets in 2017 with both equities and emerging market bonds producing relatively high returns amidst low market volatility – but the road ahead looks more challenging. We are still broadly confident in these asset classes, and believe that the patterns established last year will largely remain unchanged but 2017 will be a tough act to follow. We believe investors will still be compensated for taking risk in 2018 – but receive lower rewards.

In particular, we anticipate the risk that the already low yields (returns generated on a bond investment) will no longer be able to offset falling bond prices in the event of rising interest rates (see below graphic). In other words, there may not be sufficient reward for the level of risk in the bond market.

geopolitical risks
5. Geopolitical risks

With tensions once again rising in the Middle East, elections looming in several emerging markets, not to mention ongoing uncertainty around North Korea, the list of political and geopolitical events that could hold the financial markets hostage in 2018 is a long one. However, in our view it is unlikely that any of these issues will have a negative impact in the longer term.

Geopolitical risks in 2018 - What is the current state of geopolitics?

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Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any financial instrument or product or to adopt any investment strategy.

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