What matters in 2018?
What will be the key market drivers in 2018? We review six, from rising corporate investment to the role of Millennials.
Capex rising
Corporate capital expenditure on equipment and structures (“capex”) slumped in 2009, as companies reined in spending and expansion plans. Capex has been rebuilding only slowly since then. With business confidence and profits high but capacity constraints tightening, we expect capex to accelerate in 2018, particularly in manufacturing, information technology, transport and warehousing, and utilities. Higher investment boosts overall economic growth while limiting inflation pressure due to productivity enhancements. This combination is supportive of risk assets.
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QExit
As the economic expansion continues and capacity usage rises, the sustainability of the major central banks’ extremely easy monetary policies is increasingly being called into question. The US Federal Reserve is already contracting its balance sheet, while the European Central Bank is set to taper its asset purchases in 2018. Tighter money is not always bad for markets as long as it reflects improving growth, but central banks’ movements toward the exit could create significant pockets of volatility in both currencies and stock markets. We expect central banks to proceed with caution, still supporting a favorable trend in financial markets in 2018.
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M&A resurgence
Global merger and acquisition (M&A) activity is expected to rise in 2018, encouraged by the strength of the global economy, historically high corporate cash levels, still low financing costs and a proposed tax break for US corporate profit repatriation. The effort to create regional champions in Europe is an additional driver. Among sectors, healthcare is likely to see the strongest M&A activity globally. In the financial sector, increased pressure for consolidation may also drive merger activity, not least in Europe’s fragmented sector.
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China developments
After a remarkable credit expansion over the past decade, China’s high corporate debt levels are set to remain a lingering concern in 2018. Any downturn in Chinese growth would be a risk to the global economy and markets. An apparent policy bias toward stability and credit restraint in China are encouraging, but not without risks for asset prices, the economy and the Chinese renminbi. A growth scare as we saw in 2016 cannot be ruled out, but our base case calls for a steady adjustment process with currency stability.
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Investor complacency
When stock markets rise with extraordinary resilience as in recent years, investors tend to start “herding.” Passive investment in stocks tends to rise while perceptions of risks tend to fade, up to the point where there is a correction. Are investors too complacent now? Despite the remarkable uptrend, sentiment surveys show that the consensus remains quite cautious on stocks, with an unusually large majority of opinions in fact neutral. It may be true that the best time to buy stocks is when others are fearful, but that does not mean one should sell as soon as the market becomes relaxed.
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Millennials’ footprint
Millennials, one of the largest generations in history, are coming of age as consumers, investors and trendsetters. Placing great importance on topics such as sustainability, clean energy and impact investing, Millennials are opening up new opportunities for investors. In 2018, we see renewable energy, including solar, wind and energy storage systems, as offering strong prospects. In contrast, Millennials’ preferences for online shopping can be expected to keep pressure on the traditional retail sector.
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