CIO Investment Outlook
The consequences of monetary tightening will define the 2018 investment landscape.
While I am optimistic about the long-term productivity improvements and investment opportunities highlighted by our technology and energy research, I think the demographic drag looks set to dominate growth prospects for now. As monetary policy support is withdrawn in 2018, many investors face a rude awakening if the risk premium is more accurately priced into markets.
Twelve months ago, I worried 2017 could see markets come down to earth with a bump, triggered by rising populism and the clamour for protectionism. However, I underestimated central banks being able to keep the liquidity taps aggressively turned on, supporting growth and asset values.
Despite low nominal GDP growth, loose monetary policy has kept volatility low, asset valuations high and structural problems such as poor demographic trends and high debt at bay. The key difference in 2018 is that central banks are now removing their support. As long as economic growth and corporate earnings remain robust, then equity and credit markets may maintain their lofty valuations. But as the tide of quantitative easing goes out, I suspect we may be surprised by how many have been swimming naked.