In the first IDB of 2018, we take a look at macroeconomic expectations for 2018 and consider the key risks facing financial markets this year.
Consensus growth projections have shifted higher and the global economy is now expected to expand by nearly 4% in 2018. The breadth and balance of the current cyclical upswing is demonstrated by almost all developed market countries contributing positively to growth. The key threat to financial markets comes from a fast pace of monetary tightening.
In the US, strong underlying momentum is provided by consumption and an improving capital expenditure outlook. Current FOMC inflation projections suggest a gradualist approach to future interest rate hikes, but this could be challenged if tax cuts and a tightening labour market stoke inflationary pressures quicker than expected.
In Europe, inflation continues to undershoot the 2% target, but the firmer footing for growth and narrowing output gaps may test European Central Bank (ECB) dovishness and put pressure on the Bank to adjust policy later in the year.
Other key talking points for 2018 include the risk of a Chinese slowdown, asset market turbulence as QE comes to an end and European politics.
Whilst volatility remains subdued there is a risk of damaging spikes. As a result, at London & Capital we are continuing a slight asset allocation skew towards equities whilst remaining mindful of valuations. Our Fixed Income strategy remains overweight in financial, emerging markets and cyclical issuers.