As we approach 2018, the global economy is maintaining strong momentum. In the US, a robust economy is boosting consumer confidence which rose to a 17-year high in November. This may result in higher consumer spending and further reinforce the ongoing economic expansion.
The 2017 UK budget was a mixed bag and direct market impact has been muted, but of greater significance was the fact the OBR downgraded the outlook for the UK’s productivity growth, business investment and GDP growth over the next five years. If the OBR’s latest estimates on GDP growth rate and the labour market are correct, the next few years could bring a combination of weakening economic growth and rising unemployment. The government may find itself with a lot less room for manoeuvre.
Elsewhere in the developed markets, the Euro-zone continues to enjoy a strong period of economic performance and economic activity is at its strongest pace in a decade. The strength of business and consumer confidence indices and various leading indicators of economic activity suggest the positive growth momentum should carry through into 2018.
In recent weeks, the financial markets have been boosted by growing optimism about the proposed tax cut package that is currently being finalised in Washington. In contrast, bond yields have risen (and capital values fallen) as a raft of economic data releases have pointed to stronger growth and reinforced the case for further tightening in monetary policy in the US and less accommodative policy stance elsewhere.
While there has been a broad-based rally across global equity markets, financial stocks and small capitalisation stocks have performed particularly well on the back of the news. The financial sector has also benefited from investors’ expectation of a looser regulatory regime under the Trump administration.
We expect equity markets to approach 2018 in buoyant mood. However, we remain cognisant of risks that lie ahead. For instance, the debate surrounding the debt ceiling in the US, the possibility of another flare up in geo-political risks and uncertainties around Fed policy under a new Chair are just some of the challenges that investors will have to contend with in the New Year.
Abi Oladimeji, Chief Investment Officer at Thomas Miller Investment