After more than a year of unusually benign market conditions, February began with a rolling wave of volatility, the likes of which we haven’t felt for over 2 years. Measures of share market volatility spiked to their highest levels since August 2015.
Despite the media hype, the pullback has generally been described by most of us industry experts as “healthy” and “long awaited”, given that we had seen 15 straight months of gains for US shares and January had just delivered the strongest start to the year for three decades. In the short term, this should not detract from the solid global economic outlook for 2018.
For the first time in a decade all the world’s top economies are growing. The International Monetary Fund (IMF) forecasts the global economy will expand 3.9 per cent in 2018, the fastest rate in eight years, up from 3.7 per cent last year. US growth is expected to reach 2.9 per cent this year on the back of tax cuts. The Eurozone, Japan and some emerging economies such as Brazil are also tipped to gather steam this year.
In the US, the recently unveiled US$1.5 trillion Trump infrastructure plan along with the US$1.5 trillion tax package approved late last year should also help buoy markets in the months ahead. But a big risk to the impact of these growth stimuli could be rising interest rates, which would be a natural response to stronger growth and higher debt levels. The speed of these rate increases will go a long way to determining how good a year we can expect in local and international share markets.
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