Global Economy Likely to See Sustained Growth in 2018

World economy is likely to see sustained solid growth with the global GDP growth accelerating slightly to a pace of 3.8%, even as monetary policy becomes less accommodative, said Credit Suisse in its Investment Outlook 2018.

In addition, corporate capital expenditure, having been restrained in recent years, will become a key growth driver going forward, TradeArabia reported.

Given this favorable backdrop, investors can expect still robust returns for risk assets in 2018, albeit more limited after the exceptionally good investment year in 2017, said the top Swiss bank in its report published Friday. Global inflation is forecast to reach a benign 2.7%, it added.

In addition, corporate capital expenditure, having been restrained in recent years, will become a key growth driver going forward. Given this favorable backdrop, investors can expect still robust returns for risk assets in 2018, albeit more limited after the exceptionally good investment year in 2017.

The global economic growth is expected to remain robust in the months ahead, supported by both advanced and emerging markets. This continued strength implies a very low risk of a global recession.

GDP Growth Positive

In the US, stronger corporate capital spending, a recovery in productivity and a likely fiscal boost should extend the strong business cycle for another year. (2018 forecast year-on-year GDP growth of over 2.5%.)

The eurozone is likely to see a continuation of the newfound cyclical strength barring an unlikely political crisis or a sharp appreciation of the euro. (2018 y-o-y GDP of over 2%.)

Switzerland is expected to benefit from a favorable export outlook given stronger global growth and a weaker Swiss franc. The two main domestic growth drivers of recent years–immigration and the property cycle–are seen as ebbing. (2018 y-o-y GDP of over 1.7%.)

On the Middle East, the Credit Suisse outlook said the collapse of oil prices in 2014 led to an unprecedented process of reform across the region as governments grappled to bring the resulting fiscal deficits under control.

Many of the changes being undertaken now–reducing subsidies, introducing taxes and economic liberalization–have been long overdue and their introduction will weigh on growth for some time.

Prices may also rise temporarily as a result of tax hikes or price liberalization. However, the negative impact should have no bearing on oil policy or the region’s currency pegs, which have immense political importance.

Emerging Economies

Indeed, Credit Suisse believes the Middle East could account for 7-8% of the emerging market equity space–a considerable achievement given its zero weight just a few years ago. In turn this should trigger billions in portfolio inflows as both passive and active investors adjust their exposure, said the report.

 Looking ahead, two key areas of risk and uncertainty stand out. First, a failure of the reforms to lift the non-oil economy would present a challenge to the region’s growth outlook and raise questions over the course of government policy, stated the top Swiss bank in its 2018 outlook.

Second, further increases in intra-regional tensions could weigh on both business and consumer spending, which in turn would act as a headwind to economic recovery and raise the risk of capital outflows, it added.

The emerging economies are expected to remain a growth pillar to the global economy, with limited upside risks to inflation and interest rates as long as their currencies remain stable.

China is going to continue to play a vital role, with its growth contribution to the world economy seen as rising further given the country’s increasing weight.

As China’s leaders remain strongly focused on stability, Credit Suisse expects a fairly smooth adjustment process with currency stability. In the longer term, high corporate debt levels remain a concern. (2018 y-o-y GDP of over 6.5%.)  

"Corporate capital spending, merger and acquisition activity and, in turn, increasing corporate debt look set to become big topics in 2018,” remarked Michael Strobaek, global chief investment officer of Credit Suisse.

Next Generation of Investors

This year’s Investment Outlook also takes a special look at the next generation of investors, the millennials, and their priorities. With 50% of the world’s population under the age of 30, this generation is becoming an influential force in the world, the report said.

The Investment Outlook highlights energy efficiency, sustainable consumables and blockchain as three key priorities for the millennials.

Even after a year of exceptionally good returns in risk assets, Credit Suisse investment strategists believe that global equity markets have further upside potential in 2018, as strong economic growth boosts earnings and increases confidence. This should encourage further inflows into equities. The withdrawal of liquidity from central banks is the main challenge, particularly in the latter months of 2018.

Credit Suisse tends to favor equities over credit. Emerging market equities are expected to generate low double-digit total returns in 2018, with good prospects for small caps in particular. In developed markets, Japanese and Swiss equities are seen as offering the best potential.

Sector-wise, preferences include healthcare, telecoms, industrials and financials. Eurozone real estate equities also offer attractive opportunities for investors given still high yields.

In fixed income, Credit Suisse expects bond yields in most developed markets to rise moderately, while they should plateau in the US, at around 2.7%.

In emerging markets, a particular preference is for local currency debt given the still high carry and potential for further local interest rate cuts.

In currencies, the Federal Reserve’s tightening steps may stabilize the US dollar, but the likely upward adjustment in European yields suggests that the euro could extend its gains, said the global banking giant.

In commodities, robust economic growth should continue to support commodity demand and prices, with oil seen trading in a range, it stated.