What will move the Global Capital Markets in 2018?

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By

Siddhartha Rastogi

Global economic growth and liquidity will continue to push the skeptics out, returns will beat the hell out of pessimists. 

Last year, when I was writing a similar note, there was gloom and doom everywhere with Trump, demonization overhanging along with Brexit fears and the rise of right wing conservative nationalism gripping Europe.

Luckily, the world enters 2018 with a strong underlying global economy, an upswing in the global metal index, and a rise in realty prices globally (barring India and China). The macro-economic strength should reflect in the global economy poised to grow @ 3.8% in 2018.

What are the major trends and phenomena to look for in 2018?

One event that went largely unnoticed was China’s downgrade by S&P to A+ from AA- on account of a rapid buildup of debt. China’s total debt stands @ 250% of GDP. Though Xi Jinping has begun to rein in cheap debt, he has had limited success thus far. Chinese bond yields have gone up beyond 4% with correction in equity markets. The bigger fear is on account of Hukou rental reform, or household registration policy, and the large oversupply of empty houses in China, both of which can cool off real estate in China and knock off demand for metals, impacting global metal indices.

The Saudi Aramco IPO is another global event supposed to take off in late 2018. Oil is already at a 2-year high and is expected to remain buoyant in 2018 with OPEC and Russia suggesting cuts as and when supplies increase. Mohammed Bin Salman – Crown Prince of Saudi Arabia – will face the international community and will keenly be watched on his ability to successfully pull through the Aramco IPO pitched at a 2 trillion USD valuation. Shale production has stabilized on account of rising crude prices and has been one of the major job creators in the US. Hence, it’s in Saudi, Russia and OPEC’s interests to keep crude above the 60 USD mark. This can be a dampener to oil importers, including India, which is hoping to post 6.7% to 7% growth in the next fiscal on account of reforms undertaken in the past 18 months.

Brexit negotiations and the Italian elections can impact the global capital markets. It’s highly unlikely that negotiations will get over in 2018, and in case there is no deal between the UK and the EU, the GBP can weaken significantly against the Euro. This will attract a lot of Russian and Middle-Eastern money into the UK realty despite an increase in GBP interest rates.

Italy, which goes for national polls in March 2018, can change the course of the country and in turn the recovery in the Euro region. Early indicators show that the ruling Democratic Party (PD) may face defeat and the anti-Euro camp led by former Prime Minister Silvio Berlusconi may look for Italeave after winning the poll.

The world can witness global inflationary pressures in 2018, ending the bond party and perhaps spooking the equity markets with an increase in interest rates faster than economists globally have envisaged. The UK has seen a 3% jump in inflation whilst US inflation remains below 2%, which is within the comfort zone of the Fed. However, rising energy prices and consumption can derail the controlled inflation, prompting the Fed to take more than 3 hikes in 2018.

ECB may end the bond purchases program and start giving cues to the market for increasing interest rates in 2019. India has already seen a high jump in inflation beyond the RBI’s comfort zone, but the RBI will await the first half of the year to see the GDP growth figures before making any move. Also, electoral pressures will force the Indian government to prompt the RBI to avoid increasing rates until inflation moves beyond 5 and 3 quarters.

A positive jump in trade growth can lead to faster earnings and more returns in global equities. Japan’s Nikkei rose to a 25-year high in the backdrop of Japanese multinational firms benefitting from the global trade uptick. For 2017, WTO has revised its estimate for world trade growth to 3.6%, up from an earlier estimate of 2.40%. 2018 is also expected to post trade growth north of 3% on account of faster GDP growth by the US and Euro zones.

2017 has been a phenomenal year for emerging economy India. It has seen investment of USD 8 billion USD from FIIs this calendar whilst domestic investors have pumped in close to 18 USD billion in domestic equities. This is just the beginning and financialization of the Indian economy will also drive financialization of savings. India remains one of the most under-invested countries in the world in terms of equity investing. Equity investing as a percentage of financial savings remains at 5% compared to China’s 14% and the US’ 42%. With Moody’s upgrade behind, FII inflows into Indian equities should revive.

Mutual funds (MF) will keep driving savings into formal investments. MF Assets Under management as a percentage of GDP remains as low as 12% in India while western countries like the US and Germany have exceeded the 50% mark.

With eight state elections in 2018, the NDA – the ruling party in India will try to retain its claim on 3 large states Madhya Pradesh, Chhattisgarh and Rajasthan. Inroads into Karnataka, another big state in Southern India, will strengthen the saffron movement down the Southern peninsula. A victory in Karnataka will improve the chances of a stronger majority for the NDA in the 2019 General Elections.

Lower borrowing costs, lower real estate costs, and consolidation of demand from unorganized to organized will ensure higher profitability of well-managed and well governed firms in 2018.

Siddhartha Rastogi

Siddhartha was born to a learned middle class educated family in Semi Urban India. His father was an extremely honest man who because of his honesty had to pay the price in corporate world. Mother is a determined woman who ensured that children are being well taken care off. After a few years of birth, doctors called Siddhartha, a slow child having flat foot. He would fall more than he could walk. Determined mother ensured all therapies for her son to come out strong to fight the world. Siddhartha joined swimming when he was in 6th standard. Seeing other children of his class, he jumped in 10 feet deep pool and learnt swimming on his own, the very same day.

From that day there was no looking back. He topped his city in 12th and went to score highest in his B school exams. During his profession as banker, he became youngest branch manager of a MNC bank managing their biggest wealth branch in the country. There he found love of his life and got married. His love of his life emerged in the form of his daughter who completely changed him for good.

Siddhartha Rastogi is Director for a boutique Investment bank in India.

Siddhartha is a forward looking thinker & writer who has written a book on decision making. 8 Simple steps to effective decision making.

He writes on various social and current issues via his blog and can also be found on twitter.