Aberdeen Standard Investments expects 2018 to resemble a more mature version of 2017 as healthy economic growth further reduces global spare capacity and with a consequent gradual rise in inflation. This should allow monetary policy to become less accommodative but not genuinely tight.
However, this benign outlook is not without risks. Central banks could, by choice or force, tighten policy too much either because they overestimate how self-sustaining growth and asset prices are, or underestimate how quickly inflation pressures will build. Currently there are few signs that this is happening.
Another risk is that the crystallisation of geopolitical risks could derail the recovery, but outside of low-probability events such as an outright trade war between the US and China, or nuclear conflict on the Korean peninsula, the current political environment appears to be more of a constraint on the longer-term growth outlook than an immediate danger to the current cycle.
One risk of greater concern is a sharper-than-expected growth slowdown in China. Not only is it the one major economy where growth signals are moderating but it is also carrying the largest economic imbalances.
Alexander Wolf, Senior Emerging Markets Economist, Aberdeen Standard Investments, commented “Our judgement is that the near-term risk of a hard landing in China is low thanks to the country’s strong external funding position and unique institutional features. However, even a repeat of the growth swoon of 2014 and 2015 would have global ramifications, especially for emerging markets. For now our expectation is that growth will slow modestly and in a controlled manner.”
He continued, “Looking ahead, we see trade, technology, and politics as central themes for the global economy in 2018. China led the recovery in global trade in 2017 but we are now seeing evidence of developed markets playing a larger role as China’s contribution starts to moderate. If this developed market activity can be sustained then it will provide added impetus to growth.
This will be particularly important for Asian emerging markets, where trade is a significant driver of currencies, earnings, equity markets and growth. However, trade is increasingly at risk from political factors as enthusiasm for globalisation gives way to protectionist impulses. From this perspective, the evolution of the US-China relationship could be critical in shaping 2018. Tensions on the Korean peninsula and in the South China Sea, as well as economic nationalism, have the potential to impact trade negatively.
One area to watch is the tech sector, which is growing increasingly important to both countries and where competition has intensified accordingly.”
Nicholas Yeo, Director and Head of China/ Hong Kong Equities, Aberdeen Standard Investments, added “The Chinese government’s focus on supply-side reform, the shift towards a services and consumption-based economy and transition towards quality growth bode well for the long term. Nevertheless, the high levels of debt and non-performing loans remain risks to China’s financial system. Uncertainty in geopolitical development could also unsettle markets.
At the corporate level, earnings growth has recovered, the supportive fundamentals and expectations of improved profitability are strengthening investors’ confidence to pay for future growth. The tech sector has been the primary driver of the continued market rally, though we are starting to see it widening out to other sectors recently. The strong market momentum is expected to continue in the coming months, although a healthy correction may be on the horizon and US rate hikes will add uncertainty to the second half of the year.
We believe the key to investing in China is to separate the wheat from the chaff with a bottom-up, long-term strategy, to identify quality companies that can tap into the country’s growing disposable income and affluence. One interesting trend is the premiumisation of the services and consumer sectors, including travel, financial services (wealth planning) and healthcare, where new opportunities are emerging as more companies shift towards quality, value as well as higher-margin segments.”
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*as of 30 September 2017
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