A new investment year begins – strong global economic growth supports the markets
Globally, economic growth is cur-rently strong, with GDP growing in practically all of the OECD coun-tries and even accelerating in many. The new investment year is supported by exceptionally broad-based and strong economic growth around the world. This has of course already been factored into the money markets and 2017 was the strongest upward year since 2009, with the MSCI World All Country index rising +19.8%. Inter-est rates remained relatively low due to moderate inflation and the resulting stimulating central bank monetary policy. We are coming into the new year in a neutral posi-tion in our allocation products in terms of equity weight.
On the fixed income markets, the year ended with a slight rise in in-terest rates. However, the interest rate level remained exceptionally low in Europe in the long term, compared to current economic growth. The non-existent inflation is the factor due to which central banks in Europe are only now, very slowly, dismantling their massive stimulus measures. This holds a possible element of sur-prise for this year: even a moderate rise in inflation due to the impact of rising wages, raw material prices and other factors might shift the current factoring in of the ECB’s key interest rate (first key interest rate hike sched-uled for mid-2019) closer to the pre-sent. Short and long-term rates would rise as a result. The corporate bond markets featured the largest ever scramble onto the issue markets, with compa-nies buying up financing from the bond and bank loan markets. Credit risk premiums are at this cycle’s bot-tommost figures and the low level of the underlying interest rate is pushing companies’ interest expenses down-wards. For investors, this means se-lectivity when choosing bonds. In our view, many corporate bonds were ineligible for investment at the end of last year.
Globally, equities reached the best figures since 2009, with the MSCI World All Country index rising +19.8% last year. In the US, the to-tal return on the S&P 500 index was +21.8% (in dollars), but due to the weakening of the currency, only +6.9% (in euros) without hedging. Meanwhile in Europe, the Stoxx 600 index’s total return was +10.6%, which meant that, finally, Europe per-formed better than the US (in euros).
Last year, the stock volatility was the second lowest in US history measured during the calendar year, as equities rose without any signifi-cant turbulence. Earnings growth ex-pectations have supported this: cur-rently, +11.5% earnings growth is slated for the S&P 500 index for 2018, accompanied by a significant decline in the corporate tax rate, and +9% earnings growth for the Europe-an Stoxx 600 index. Also the earnings forecasts of emerg-ing market (EM) stock markets have been raised, which means that global economic growth and the positive earnings forecast development will provide the equity markets with sup-port as we enter the new investment year.
Juhani Lehtonen, Head of Fixed Income & Market Strategy Investment Solutions