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The first week of 2018

While share markets saw a softish last few days to 2017, they have started 2018 on a solid note with strong gains in all major markets helped by favourable economic data and as seasonal cheer kicked in again.

US shares rose 2.6% to a new record high, Eurozone shares rose 3%, Japanese shares rose 4.2%, Chinese shares rose 2.7% and the Australian S&P/ASX 200 Index rose 0.9%, taking it above 6,100 for the first time in ten years. Bond yields have also pushed slightly higher over the last week as have prices for oil, gold and iron ore. The combination of further weakness in the US currency and rising commodity prices has seen the Australian dollar push higher.

Are global economic conditions so good that they are bad? We are continuing to see record or near record highs in various business and consumer confidence readings globally. A concern is that as historically seen, it doesn’t get much better than this and we saw how similar readings around 1999-2000 and 2006-2007 ended; badly.

The big difference this time, compared to those periods of similar highs in confidence readings is that at those peak inflation levels it was becoming more of an issue and global monetary policy was tight and bearing down on growth, whereas now inflation is still low and monetary policy remains easy.

In other words, we are still in the “sweet spot” in the investment cycle, which augurs well for further gains in growth assets, albeit share market volatility is likely to rise and returns are likely to be more constrained this year as inflation starts to rise in the US and geopolitical risks become a focus again.

Geopolitical risks are likely to figure more highly in 2018. Geopolitics was a focus in 2017 but it mostly turned out okay, as President Trump focused on business-friendly policies, there was no trade war with China and European elections saw support for centrist pro-Euro parties.

2018 may not be quite so smooth though, as the risks around US politics rise (as the mid-term elections and the Mueller inquiry ramp up the risk of more populist policies from Trump), the risk of US tensions with China rises as a result and as Italy heads to the polls on 4 March. In terms of the latter, the Five Star Movement has a good chance of “winning”, the prospects of which may cause some investor nervousness but it won’t get a parliamentary majority and is unlikely to be able to form government. In any case it has relaxed its anti-Euro stance lately. (Source: Fin Sec Partners)

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