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Investment themes to watch in 2018: inflation, 'value' and emerging markets

 
David Brett
Fund manager Johanna Kyrklund of Schroders
Fund manager Johanna Kyrklund is optimistic about emerging markets

Inflation, interest rates and politics are big themes for investors in 2018 but how will they affect asset prices? Below, fund managers from Schroders give their perspectives on the year ahead in three 60-second videos.

Where to consider investing for 2018

Johanna Kyrklund, global head of multi-asset investing at Schroders, is optimistic for 2018 and favours emerging markets and value stocks [value investing explained]. However, she expects to become progressively cautious as central banks begin to tighten their monetary policies towards the end of the year.

"For the first time in many years we are experiencing a synchronised global economic recovery. At the same time interest rates are quite low and inflation is well behaved," says Kyrklund.

"This has led us to be optimistic on financial markets all year and we continue to be optimistic as we move into 2018.

"We are favouring emerging market assets in particular because we think they still have relative valuation support. We also like value stocks.

"However, we can’t take that optimism as a sign of complacency – we need to be very careful as we go into 2018 because valuations are quite stretched.

"Although we expect inflation to be quite well behaved, certainly we could get a cyclical increase, we don’t expect it to get out of control.

"We need to recognise that in any case central banks will be gradually withdrawing liquidity over 2018 so we expect to get progressively more cautious as the year continues."

Should we prepare for higher inflation?

Marcus Brookes, fund manager and head of multi-manager at Schroders, says the economic growth seen in 2017 is strong enough to continue into 2018, but investors should be prepared for the inflation that potentially comes with it.

"Since 2016 the economic environment across the globe has seen a period of quite low growth and quite low inflation. In fact, many economists have called it a period of secular stagnation.

"Towards the end of 2016, we saw a synchronised pick up in economic growth which led into 2017. Indeed, we think that is strong enough to go into 2018, so we’re quite bullish on economic growth.

"The factor that seems to be missing since 2016 is inflation, although we have seen a slight pick up in the UK. Our base call is, as this economic cycle matures, we get a little bit more inflation.

"So, the portfolio needed for 2018 may need to be reflective of this idea. Perhaps less bonds and growth defensives and perhaps a few more cyclical stocks in the portfolio as this cycle comes a bit more mature.

"There is one note of caution though; quantitative easing has meant investment returns have been fantastic across all markets now. In fact, the US stock market is in its second longest and second most powerful bull market in history.

"That said, a supportive economic environment could mean that this continues for a while yet."

Can the stock market rally continue?

Alex Tedder, head of global and US equities at Schroders, says 2018 could be another solid year for global equities barring any unforeseen spike in inflation or political upset.

​"2017 was a terrific year for global equities. There is a very good reason for that; global economic growth and earnings growth was strong, particularly in emerging markets and Europe," says Tedder.

"Going into next year, they key question is around valuations.

"There is no doubt valuations are high, particularly in the US which is in the eighth year of a bull market. That is something we need to be mindful of as we go into the new year.

"That said, the outlook for growth is still very good and there are no signs of inflation picking up sharply in any major economy around the world.

"On that basis, barring any political upset or an unforeseen spike in inflation, we believe the outlook for global equities in 2018 is solid."

You can read a range of outlooks from Schroders fund managers here.

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