• Still in the sweet spot for investors – a further rise in global growth to around 3.9%, driving solid earnings growth with continuing low inflation and easy global monetary conditions should keep investment returns favourable.
• But expect more volatility as US inflation stirs, the Fed hikes more than the market expects, other central banks edge towards less stimulus and political risk increases.
• Apart from the likelihood of more volatility through the year, global shares are likely to trend higher through 2018 on the back of rising earnings and still easy monetary conditions.
• Australian shares are likely to do okay but underperform global shares with returns around 8% with moderate earnings growth. Expect the ASX 200 to reach 6300.
• Commodity prices are likely to push up with global growth.
• Low yields and capital losses from a gradual rise in bond yields are likely to see low returns from bonds.
• Unlisted commercial property & infrastructure are still likely to benefit from the search for yield, but it is waning and listed variants are vulnerable to rising bond yields.
• National capital city residential property price gains are expected to slow to around zero as the air comes out of the Sydney and Melbourne property boom and prices fall by around 5%, but Perth and Darwin bottom out, Adelaide and Brisbane see moderate gains and Hobart booms.
• Cash & bank deposit returns to remain poor at around 2%.
• After a short-term further bounce higher, the $A is likely to fall against the $US as the gap between the Fed Funds rate and the RBA’s cash rate goes negative. Solid commodity prices will provide a floor for the $A, though.
  

  ---

• The post-GFC hangover has faded with high levels of confidence helping drive stronger investment and consumer spending. Self-sustaining growth has returned.
• Global monetary conditions are still easy. While some fret about a flattening US yield curve, this is unlikely to signal a growth downturn because it’s been driven by rising short rates rather than falling long rates, high demand for long bonds as a portfolio diversifier and continuing QE in Europe and Japan holding down global and hence US bond yields.
• Fiscal austerity has faded, with the US seeing stimulus.
• We have not seen the excesses – massive debt growth, overinvestment, capacity constraints or excessive inflation – that normally precede recessions.

Three reasons why a grizzly bear market is unlikely

• A recession is unlikely with growth more likely to accelerate. Most grizzly bear markets are associated with recession.
• Short-term sentiment measures are bullish but longer-term sentiment and positioning suggests investors are far from euphoric. (Some of the euphoria may have even been siphoned off to schemes like Bitcoin!)
• The liquidity backdrop for shares is still positive, with low rates still providing an inducement to allocate to shares.
  

  ---

Three reasons why risks around Trump may rise a bit

• Much of his business-friendly policy agenda has been implemented notably tax reform and deregulation. So the good news from these sources is largely behind us.
• The Mueller inquiry is getting closer to Trump. We don’t see the Republicans impeaching Trump unless there is clear evidence of wrongdoing. Even if he is replaced by Vice-President Pence, policy wouldn’t change much – but markets may worry about it and this may be intensified if Trump lashes out and creates populist distractions.
• The mid-term Congressional elections in November (with polling pointing to the GOP possibly losing control of the House) will see a renewed focus on issues around trade (as evident in just imposed US tariffs on solar panels & washing machines) and inequality as Trump tries to boost his base.

Three reasons why the trend in bond yields is likely up

• Deflation risks have retreated and are being replaced by inflation risks as global spare capacity is being gradually used up (led by the US) and commodity prices trend higher.
• Long bond yields remain well below levels consistent with nominal growth of around 3-3.5% in developed countries.
• Bonds are over-loved with a huge post-GFC inflow.

Three reasons why Chinese growth won’t slow much

• The Chinese Government’s tolerance for a sharp slowing in growth is low given the risk of social instability it may bring.
• Monetary & fiscal policy has not been tightened significantly.
• In the absence of much lower savings (the main driver of debt growth), rapid deleveraging would be dangerous.
  

  ---

Five reasons Australia won’t have a recession (again)

• The drag from falling mining investment has faded.
• Non-mining investment and infrastructure spending are turning up.
• National income is no longer falling as commodity prices have stabilised or are trending higher.
• Stronger export volumes from resource projects like LNG and stronger global growth will provide an additional boost.
• Interest rates can still fall further if needed.

Five reasons to expect more share market volatility

• As US inflation rises it will likely result in a more aggressive Fed than the market is allowing for.
• Geopolitics may be a bit more negative than it was in 2017 if Trump becomes more populist.
• Volatility indexes like VIX are around record lows and net speculative short positions on VIX (bets volatility will fall further) are near record highs, warning of some reversal.
• Low volatility years like 2017 often lead more volatile years.
• The US share market is expensive on some measures.

Three reasons Bitcoin is a bad “investment”

• It’s impossible to value, generating no income flow – making it highly speculative (as evidenced in extreme volatility) and subject to a crowd-driven mania (as we saw in 2017).
• New supply potential is huge – eg, from other crypto currencies and futures trading which is allowing easy shorting and syphoning away demand.
• Governments are likely to ramp up regulation of it, are unlikely to give up their monopoly of legal tender (and the “seigniorage” they earn from it) and will likely develop their own crypto currencies using block chain.
  

  ---

Nine things investors should remember

• The power of compound returns – saving regularly in growth assets can grow wealth substantially over long periods. Using the “rule of 72”, it will take 29 years to double an asset’s value if it returns 2.5% pa (ie 72/2.5) but only 9 years if the asset returns 8% pa.
• The cycle lives on – markets cycle up and down and we need to allow for it and not get thrown off by rough patches.
• Diversify – don’t put all your eggs in one basket.
• Turn down the noise – increasing social media and the competition for your eyes and ears is creating much noise around investing that is really just a distraction.
• Starting point valuations matter – for example still low bond yields will mean low medium term bond returns.
• Remember that while shares can be volatile, the income stream from a diversified portfolio of shares is more stable over time and higher than the income from bank deposits.
• Avoid the crowd – at extremes it’s invariably wrong.
• Focus on investments with sustainable, decent cash flows – not financial engineering and schemes like Bitcoin.
• Accept that it’s a low nominal return world – when inflation is 2%, a 10% superannuation return is pretty good (and probably not sustainable at that rate).
  

  ---

Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist

  About the Author  Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. © Copyright 2018 AMP Capital Investors Limited. All rights reserved.