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Market drivers for 2018 crucial

SMSF investors should monitor four key themes that are likely to drive investment markets this year, with encouraging conditions expected to continue, according to AMP Capital.

AMP Capital senior economist Diana Mousina said she believes 2018 is shaping up to be an exciting year for investment markets due to global growth finally being on an uptrend, as well as positive economic data coming from many countries around the world.

Continuing strength in the global growth profile is the first key theme, Mousina said.

“A number of indicators suggest global economic conditions are still very strong, hinting at a cyclical high,” she noted.

“Global economic growth is forecast to reach 3.7 per cent this year on the back of 3.6 per cent growth last year.

“Much of this activity is expected to come from advanced economies such as the United States, the eurozone and Japan. The strength those economies showed at the end of 2017 should continue this year.”

Secondly, global inflation is also predicted to rise in 2018 after trending flat for many years, and is particularly the case in the US where higher prices are welcome as the economy continues to recover and pricing power comes back into market as wages growth lifts to support a sustained recovery in economic growth, she said.

“It is, however, important that inflation does not rise too far, too fast, and remains around central bank limits,” she warned.

“In Australia, this is 2 per cent to 3 per cent – in the fourth quarter of 2017, inflation rose to 1.8 per cent, still below the Reserve Bank of Australia’s target, but indicating rising inflation is not a concern in Australia just now.”

US inflation also rose to 1.8 per cent in December, also under control, as the Federal Open Markets Committee targets an inflation rate of 2 per cent, she noted.

She highlighted global monetary policy will also have a significant impact on investment markets.

“The US Federal Reserve looks to continue raising interest rates, while other major central banks, including the European Central Bank (ECB) and Bank of Japan, are expected to keep interest rates unchanged,” she said.

“The People’s Bank of China is trying to reign in some debts issued to corporates, as well as other financial imbalances, and this will determine monetary policy in China this year.

“So, while this year there is likely to be divergence between the US and other markets on rates, in the future they are likely to start to converge.

“The ECB may start to lift rates later this year and we expect the Bank of Japan to prepare the market for a rate rise in time. But markets are not concerned about the prospect of higher rates yet.”

Finally, heightened political risks could unnerve markets and are looking more important this year, following concerns about political instability in early 2017, she pointed out.

“But overall, positive conditions are expected to continue throughout 2018, unforeseeable events notwithstanding,” she said.

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