What awaits the economy and the market in 2018? Traditionally, numerous analysts and fund managers have expressed their opinions about the future.
Absolute Strategy Research (ASR), an independent group founded by David Bowers and In Harnett, presented one of the most interesting and compelling predictions.
ASR added depth to its analysis, contrasting its own assessment with the dominant position of others.
To do this, the group asked 229 asset allocators, managing assets of about $ 6 trillion, to speak about the prospects for the economy and the market.
Incredible optimism was recorded; the likelihood of a higher stock market by the end of 2018 amounted to 61%, and the fact that the shares will bypass the bonds – 70%. Distributors believe that the probability of a global decline is only 27%.
Moreover, they are not afraid of the prospect of an increase in the Fed's interest rates.
There are some inconsistencies in this consensus.
First, investors expect volatility to increase next year (as measured by Vix). Usually, stocks have difficulty in such conditions.
The second discrepancy between their views on the business cycle and the stock market; since last year, their optimism about the former has declined, while the attitude towards the latter has become more bullish.
The third discrepancy is between their views on high-yield or junk bonds and stocks. Typically, these two asset classes show good results at the same time.
But investors are not particularly enthusiastic about junk assets, preferring debt obligations of governments of developing countries, the British magazine The Economist notes.
Bowers and Harnett believe that investors may be surprised by the slowdown in the Chinese economy. Experts do not expect anything dramatic; an increase of 6.1%, instead of the projected 6.7%. But this will slow global growth to 3.3% from 3.5%.
In addition, interest rates in America can rise much faster than investors predict. David Bowers believes this is the “second derivative” that often drives the market – not a change, but a change in the pace of change.
ASR points to monetary tightening in China this year in the form of higher interest rates and slower money growth; given the natural delay, its main effect will be noticeable in 2018.
The first signs are already visible in housing prices in Beijing and Shanghai, which were lower in October than a year ago.
U.S. and European companies have increased their capital expenditures amid higher global growth, but they may be disappointed with 2018 results.
The long term is another cause for concern. A long period of quantitative easing (QE) has forced investors to look at asset classes differently.
They were deprived of their traditional source of portfolio income; government bond yields were brought to a historic low and closed on the balance sheets of central banks.
Investors are trying to increase their portfolios with alternative assets, such as shares in closed joint stock companies. But these assets are illiquid and backed by large debts. As a result, a shock situation may arise during the next crisis, when investors try to sell these illiquid assets.