(London): Stronger global growth and a modest rise in inflation should continue to support risk assets, although further removal of accommodative monetary policies will make the environment for fixed income more challenging, according to the 2018 investment outlook from Aviva Investors.
Global GDP could approach four per cent in 2018, the fastest pace of growth since 2011. A modest rise in inflation in advanced economies is likely to offset a slight decline in emerging market countries.
The growth and inflation picture is consistent with a gradual removal of extraordinary monetary policy. The Federal Reserve is on a clearly-defined path towards higher interest rates, with a further three hikes expected in 2018. Asset purchases in the Eurozone should end in September 2018, and there is potential for the Bank of Japan to review its policy of yield curve control if core inflation rises above one per cent.
Equities are likely to preform better than fixed income in these conditions, with emerging market, euro zone and Japanese equities offering better relative value than US and UK stocks. EM local currency debt currently offers more attractive opportunities than developed market corporate debt. While developed market government bonds are likely to be challenged in 2018, long-dated US sovereign debt remains the most attractive from a capital preservation perspective should growth and inflation disappoint.
Michael Grady, senior economist and strategist at Aviva Investors, said:
“Expectations of stronger global growth and modestly higher inflation in advanced economies in 2018 provide the backdrop for a positive risk environment, just as they did in 2017. Moreover, with the improvement in the global economy and the peak of monetary policy accommodation likely to be behind us, we expect asset prices to be driven more by underlying fundamentals than at any point in the last decade.”
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