Part two of our outlook for the remainder of 2018 highlights global insights and factors.
Overseas: What should investors be wary of in the remainder of 2018?
Looking at the global picture
The first half of 2018 has witnessed a pickup in market volatility which had peaked in February and March but fell off in Q2; Brexit negotiations continued to test the confidence of the UK government and there was the threat of a trade war from the United States – these events are of course amongst a number of others. The question is; what should investors be wary of in the last six months of 2018?
Our Investment Research Manager, Sheridan Admans, gives his thoughts on the next 6 months in part two of our 2018 outlook.
Inflation going steady
Around the world, inflation in developed economies is expected to trend around 2% and rates are expected to continue to rise in the US. Global economic growth however, is expected to slow with the potential for trade tensions to slow growth at a faster pace. This, combined with the potential for oil supply disruptions in Libya, Canada, Norway and possible sanctions on Iranian oil, could see some flirtation with stagflation; though on the plus side employment remains robust.
Across the globe
The outlook for emerging market assets is looking challenging. Dollar strength will only act as a headwind to capital flows to emerging markets reliant on foreign investment. It can also make the servicing of dollar denominated debt more challenging. Trade tensions have seen the economic prospects for China deteriorate more recently with further escalation of the situation having the potential to accelerate the level of corporate defaults at a time when analysts are already predicting a record year.
A number of factors are converging that have been giving India prominence on the global economic stage. This includes high growth rates in the industrial and service sectors, significant population growth, strong domestic demand, as well as a government that is pro-business. This mix, in our eyes, makes the country hard to ignore as a long-term investment opportunity. The International Monetary Fund (IMF) currently projects India’s growth to accelerate in 2018-19 to 7.4%, which potentially positions it as the fastest growing major economy in the world.
For the remainder of the year we are anticipating growth picking up as the region heads towards a general election next year supported by government and household spending.
In Japan, there is a chance that returns from Japanese stocks remain weak in the near term, as escalating tensions between the US and China cast a shadow over trade. Additionally, failing public support for Prime Minister Abe due to the alteration of documents that directly implicate him and his wife has raised doubt over him taking a third term.
We remain constructive on the region longer-term, as Japan continues to pursue the Trans-Pacific Partnership (TPP), which should also provide the government with political cover to advance some structural reforms. Re-elected Bank of Japan governor Kuroda has been kept in place to provide stability and he has ruled out pulling the plug on its huge monetary easing experiment, expecting to maintain loose monetary policy until it reaches its 2% inflation rate target. We are encouraged and remain positive on the outlook for earnings growth, helped by improving corporate governance and the government targeting corporates to deliver Return on Equity (RoE), above 8%. And finally, Japanese equities continue to look undervalued relative to developed market peers.
Expectations are that global economic growth will slow and oil disruptions could see some stagflation. We continue to have a positive long-term regional bias for Japanese and Indian equities, while we are more cautious on China and the US.
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