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Expert predictions for 2018

We asked economists, brokers and investment managers for their predictions for the year ahead. Here’s what they told us
December 15, 2017

Markets in 2017 have been waiting for a shock that hasn’t yet come. With the inauguration of President Donald Trump, the triggering of Article 50 and a bevy of pivotal elections in Europe, nerves were high all year. In spite of this, however, growth has been relatively steady and many of the feared shocks did not come to pass. Has trouble simply been stored up for the coming year? Here’s what some experts think.

Dr John Llewellyn, partner at macroeconomic consultancy Llewellyn Consulting, said global financial markets find themselves in a unique position.

“There is no precedent for the present situation, with central banks having shouldered so much of the burden for macro stabilisation; yet starting to raise rates notwithstanding conventionally-measured inflation not being a problem,” he said, adding that fiscal policy would probably have to pick up some of the slack, especially if there is a downturn. The political landscape has also changed considerably, with the US government seemingly no longer committed to the institutions of the Western world. Dr Llewellyn said this meant markets were likely to become more volatile in the near term.

Isabelle Mateos y Lago, global macro strategist at the BlackRock Investment Institute, described investment markets during 2017 as “growth surprising on the upside, inflation surprising on the downside and many market risks not materialising”, adding that “2018 has the potential to be very different”.

Different in the sense that the shocks that have thus far failed to materialise may show up. Ms Mateos y Lago noted that asset valuations remained high across the board, leaving little margin for error, while a number of consequential events lurked on the horizon. These include the ongoing talks over the North American Free Trade Agreement (Nafta) and elections across Italy and many emerging market economies. Besides this, however, expectations were for continued growth across all regions, albeit with less scope for surprises on the upside.

 

Brexit is anyone’s guess

That said, high levels of uncertainty was mentioned frequently, especially with regards to the UK and the ongoing process of leaving the European Union (EU). David Miller, executive director of investment manager Quilter Cheviot and author of Diary of a Fund Manager, said: “It’s extremely difficult to decide how to approach the UK itself given the uncertainty about policy in Brexit. It’s difficult to make any predictions that have any credibility”.

Dr Llewellyn, however, was bearish on the UK’s prospects. He said the “mini-euphoria” surrounding the second phase of the Brexit negotiations was misplaced, as they were likely to be more fraught than the first phase. Moreover, “the UK economy is not in good shape to navigate a post-Brexit world”, he said.

Laith Khalaf, senior analyst at investment platform Hargreaves Lansdown, said the progress of negotiations with the EU would be a decisive factor in whether the UK gets an interest rate rise next year. He said a rise was likely to be small in any case, predicting that “monetary policy will still remain very accommodative, and cash will still offer very little by way of return”.

The tight guidelines imposed by Article 50, however, place something of a cap on the uncertainty of the process. Because of this, there is likely to be far less uncertainty once the process has concluded. Paul Mumford, senior investment manager at Cavendish Asset Management, said the pound was likely to strengthen once the final decisions in the process had been made, bolstering UK stocks as a result.

 

Oil be back

Investing in oil and gas stocks has come under increasing pressure in recent years with the combination of a low oil price [TK] and the ongoing shift towards renewable energy. The most recent knock came at the end of November when Norges Bank Investment Management proposed selling out of its oil and gas assets. Talk of foregoing investment in the sector to minimise the risk of owning “stranded assets” – such as oil fields that cannot be drilled – has been more and more in vogue as so-called sustainable investing has gathered momentum, but some are bullish on the prospects for companies in the sector.

Paul Mumford at Cavendish Asset Management said companies in the sector had been hardened by the challenges they have faced in recent years and could stand to benefit if the price of oil and gas finishes up above $60 per barrel.

“One thing that has changed over the years is that Saudi Arabia is keen to improve the price, Russia is happy to go along with it and Opec is looking to get the price higher,” he said.

Alasdair McKinnon, manager at Scottish Investment Trust, is similarly positive on the sector. The rise of shale oil has “not been as revolutionary as previously believed” he said, predicting demand for oil and gas would grow roughly 1 per cent per year as improving standards of living in emerging markets increase the need for energy. As yet renewables are not well-placed to fill this demand, meaning oil and gas are likely to be needed for the foreseeable future.

In addition to this, oil and gas companies tend to have strong balance sheets and dividend yields, Mr McKinnon added.

Alongside oil, Mr McKinnon predicted a return from physical retailers, which have struggled this year. Sarah Monaco, a fellow investment manager at Scottish Investment Trust, said they saw a comeback in the wings for big players displaced by the rise in online retail.

“There has to be something the incumbents can do,” she said. “We can’t assume the government is going to let them fall by the wayside.”

 

Inflation inflating… or not

Consensus among market commentators and participants was that global inflation was behind expectations during the year, and now some believe it could accelerate in 2018. Conversely, UK inflation has been rocketing along, and now experts are predicting it could begin to tail off.

Ms Mateos Y Lago predicted that global inflation would be “making a return beyond what we see currently priced in markets”, allowing the US Federal Reserve to raise interest rates three or possibly four times in the year. The eurozone and Japan will continue to experience inflation “well below target”, although strong economic activity in the countries will create upside risk that was not there in 2017.

In the UK, however, inflation is expected to ease off. Mark Abrams, partner at broker Trade Finance Global, said in his view sterling had hit a floor – at least in the short term. Combining this with rising import costs, “it appears as though these input costs will remain relatively stable and so inflation will start to ease”.

Mr Khalaf also largely believed inflation would begin to slow. Assuming Brexit is not “disorderly”, he said, inflation is likely to ease, in turn easing the income pressure for consumers. He also cited the Bank of England’s belief that wage growth would return in 2018, which could support consumer spending.

 

More outrageous predictions

Every year, trading and investment platform Saxo Bank compiles a list of “outrageous predictions” for what will happen in markets in the coming year. As the name would suggest, these are typically wild predictions conventionally thought of as highly unlikely, although some end up coming true. Often, even the most outrageous predictions fail to keep up with reality: last December the group predicted “huge gains” for cryptocurrencies. The conditions causing the gains weren’t as predicted – high spending from the Trump administration leading to emerging market economies adopting Bitcoin and blockchain in an effort to move away from a skyrocketing dollar – but the scale of the predicted gains were far too tame. SaxoBank predicted the price of one Bitcoin could reach $2,000 (£1,494) – in December that price briefly reached $16,500.

Conversely, in its latest set of predictions Saxo Bank is predicting that the cryptocurrency is running out of road. In the short term it predicts an increase in the price, peaking above $60,000 in December this year with the advent of Bitcoin futures contracts. This will be followed by moves from Russia and China to ban or sideline Bitcoin in an effort to prevent capital flight, and possibly even to create cryptocurrencies themselves. Saxo Bank said China will ban the mining of popular cryptocurrencies due to the energy waste involved, introducing an alternative with a less intensive mining process. Smooth running protocols and price stabilities in the state-run alternative will lead to a drop-off in interest in Bitcoin, leaving it trading around its $1,000 production cost.

Other predictions included Chinese tech giant Tencent overtaking Apple as the world’s largest company, with its shares increasing 100 per cent in the year to exceed $1 trillion, and the trend towards female representation increasing rapidly, leading to women being chief executives at more than 60 fortune 500 companies by the end of the year.