Ten years since the global financial crisis, investors can find differing signals in the market. On the one hand, there are signs that economic growth is becoming less dependent on stimulus from central banks. On the other hand, valuations appear to be stretched for most asset classes. History suggests that average economic cycles are about 6 years long, but this year will mark the tenth year since the start of the recovery. We must keep in mind that recovery from a banking crisis normally take longer than other forms of financial crisis. Nevertheless, an economic downturn therefore might be expected in the not too distant future. Central banks are likely to become net sellers of bonds in 2019, as the exceptional post-crisis measures are phased out. Could that mark a turning point in the cycle? Or will some other event be a catalyst?
Some investors believe that because the current bull market and economic expansion have gone on for some time, a bear market and a recession will take place soon. At this stage, there are no signals that usually warn of a coming recession, such as a loss of economic momentum or an inverted yield curve. A market correction could still happen at any time, because of the overly optimistic sentiment. Whilst central banks continue to unwind their quantitative easing policies, politics have generally become more favourable to the economy. Politics has moved from fearing debt and deficits, to using fiscal policy to support growth, as seen in the US where tax cuts have just been legislated.
For the first time since the global financial crisis, world GDP growth is increasingly strong and synchronous, although it has been supported by loose monetary and fiscal policy. Looking to 2018, we believe that the growth momentum will continue and this would be broadly supportive of growth assets. However, there are risks that will require close watching and they include a sharp and unexpected rise in inflation, the unwinding of quantitative easing by central banks and how economies deal with potentially distorted asset prices as monetary policy is tightened.