Wealth and investment firms set out their thoughts on what markets and economics hold in store for clients this year.
The new year is barely over a week old, and as in the past a few wealth and asset managem.ent houses are setting out their thoughts on what may be on the cards for markets, particularly those of Asia, in the coming months. As this week draws to a close, here are some musings.
Bank of Singapore
Our central view is that the growing resilience of emerging market (EM) currencies could extend into 2018 although some EM currencies may face a bumpier ride than in 2017.
While we forecast monetary tightening to spread from the US to other developed market (DM) economies, moderate and gradually higher G10 yields are much less of a headwind for EM currencies when both external and domestic environments are supportive of economic growth in EM.
We don’t expect strong upside in EM FX in 2018. However, further dollar weakening on a 2-3 year timeframe could augur well for EM currencies in the longer-term. Concerns over the aging US economic cycle and perceived poor political leadership could made it harder for the US to win the competition for capital and therefore does not augur well for the dollar’s longer-term outlook. By contrast, EM is characterised as early-to-mid cycle recovery and therefore could receive more relative capital inflows.
Dr John Greenwood, chief economist of Invesco
The global business cycle expansion broadened and strengthened in 2017 and will likely continue to strengthen in 2018, led by improvements in the US and the eurozone as well as steady contributions from China and India.
Most emerging economies’ momentum is improving, although in China this momentum has been weakening slightly, led by a mild slowdown in the property sector. Despite this slowdown, Dr Greenwood said he expects 6.6 per cent real gross domestic product growth in China and 1.0 per cent consumer price inflation in 2018.
“Through last year we witnessed continued reductions in excess capacity in numerous state-owned sectors of the Chinese economy, including in basic industries such as steel, coal and electricity, but the economy continued to improve in the face of these challenges,” said Dr Greenwood. “Meanwhile credit growth has slowed to its lowest level since the Financial Crisis, and Chinese authorities have kept monetary policy broadly stable through the latest credit surge. These indicators support the view that China is engineering a steady domestic recovery.”
“Another interesting development has been the improvement in both Chinese exports and imports in 2017, which indicate that the prolonged slump in world trade has turned a corner. This should be positive for commodity exporting economies which are dependent on Chinese demand for their raw materials,” Dr. Greenwood added.
Among the East Asian economies, Dr Greenwood’s said the outlook for manufacturing countries that are heavily involved in regional supply chains will depend primarily on the business cycle upswings in the US and Europe. They will depend less so on the domestic Chinese economy, since China imports mainly raw materials and capital goods rather than manufactured goods. Given this continued business expansion in the US and Europe, he expects South Korea, Taiwan and Hong Kong to grow at 2-3 per cent in 2018, while the ASEAN economies are expected to grow at 4-5 per cent.
Turning to different matters, Dr Greenwood sees further room for improvement in global employment. While unemployment has dropped in most major economies and measures of labour force tightness have increased, participation rates in several countries are low, and many part-time workers would like to be working either longer hours or full-time.
With regards to current asset valuations in the market, Dr. Greenwood asserts that high valuations need not be a threat to economic expansion. “For much of 2017 investors were fearful of a major correction in bond and equity markets, but no obvious buying opportunity presented itself. Now equity and real estate valuations are at elevated levels, but high valuations alone do not produce market setbacks. The current level of asset prices is not based on high leverage but rather extremely low interest rates. As long as central banks raise rates cautiously and the business cycle expansion remains intact, financial markets can continue to discount continued earnings growth for several years ahead.”
Carl Tannenbaum, chief economist, Ryan James Boyle, senior economist, Vaibhav Tandon, associate economist and Brian Liebovich, chief dealer, Northern Trust
The Japanese economy performed better than expected in 2017, aided by stronger exports and associated increases in business investment. Stimulus measures boosted corporate profits and business sentiment to an 11-year high. Looking ahead, we expect fiscal and monetary policies to provide a much-needed impetus to domestic demand and lead the Japanese economy to expand by 1.4 per cent in 2018. Preparations for the 2020 summer Olympic Games in Tokyo will bolster GDP.
Higher oil prices and recent weakening of the yen should underpin inflation over the coming months. However, sluggish wage growth despite tightening labor markets (owing to structural challenges such as ageing and declining population) means inflation will pick up only modestly to 0.7 per cent this year. The consumption tax hike to 10 per cent, originally scheduled for October 2015 and then deferred to April 2017, could have provided a welcome boost to inflation, but has been further rescheduled to October 2019 over concerns that raising the tax might derail the economy.
As inflation continues to fall far from the 2 per cent target, the Bank of Japan is expected to maintain its benchmark policy rate at -0.1 per cent and its yield control target of “around 0 per cent” on 10-year government bond yields. The latter could be a challenging task amid rising global yields.
In our view, more needs to be delivered in terms of structural reforms (also referred to as the third arrow of “Abenomics”) to achieve sustainable longer-term growth with an inflation rate of close to 2 per cent. Watch for a renewed commitment to these alterations to economic functioning.
Despite growing concerns, the Chinese economy maintained its momentum in 2017. Growth stabilised, producer prices recovered (mainly driven by metal prices), money and credit growth decelerated, and the currency stabilised. In our view, these developments should help policymakers to further accelerate deleveraging efforts, in line with the message (from the 19th Party Congress) of an emphasis on quality rather than quantity of economic growth.
Other areas highlighted by the Communist Party’s Politburo include financial risk prevention, poverty alleviation and environmental protection. The housing sector, which has been on fire in recent years, has finally started showing signs of cooling. A pollution crackdown has led to closure of a number of factories and mines, weighing on growth in the near term.
China’s effort to reduce risks in the financial sector has led to higher borrowing costs, and as a result, growth is likely take a hit. Overall, we expect Chinese GDP growth to cool to 6.4 per cent in 2018. Consumer price inflation, which remained benign in 2017 due primarily to softer food prices, should accelerate to 2.3 per cent.
China’s wish to step forward on the global stage will cheer some and worry others. Potential recipients of investment under the Belt and Road Initiative will be eager for the support, while others may seek to call out China’s economic practices for criticism. Maintaining good economic relations with its trading partners will be an imperative for President Xi Jinping in the coming year.
Dong Chen, senior Asia economist at Pictet Wealth Management
(Chen writes about recent Chinese central bank foreign exchange reserve figures and ponders what such data says about the country’s economy.) Reserves stood at $3.14 trillion at the end of 2017, up by $20.7 billion from November and the 11th straight monthly rise since February of last year. Pictet estimates that a total of $166 billion flowed out of China last year, far below the outflow of $761 billion in 2015 and $500 billion in 2016.]
“The decline in capital outflows primarily reflects the effectiveness of strengthened capital controls over the past two years. It may also reflect improving domestic and foreign investor sentiment towards China. The recent surge in FDI inflows to China is another sign of improving sentiment,” he wrote.