DBS 2018 Outlook: Strong tailwind
- 2017, marked by solid demand, low inflation, and ever-rising assets, will be a hard act to follow
- Momentum will likely spill over to the next year, keeping the data flow strong at least through 1H18
- Asia’s open, trade-dependent economies will continue to enjoy their moment in the sun
- We will keep an eye on geopolitics, bond and credit markets, energy, commodities, and protectionism
- Volatility could rise; A key upside risk is the long-awaited return of a global cap-ex cycle
This is an excerpt of our annual report for 2018. For the full deep-dive into the issues that we will be watching next year, please click on the link at the bottom or the panel on the right.
The US economy and markets have enjoyed a sweet spot lately, with activities rising appreciably while inflation remains muted. Wage growth is no longer anaemic, reflecting a gradually tightening labour market, but still far from causing any concerns about margins or inflation. Asset markets are buoyant, ignoring domestic political noise and a plethora of outstanding geopolitical flashpoints.
We think that growth could continue to deliver robust numbers in the quarters to come. Economic growth has averaged only about 2% so far this decade, but there were clear idiosyncratic drags holding back growth over the past five years or so. We are optimistic that growth will head to around 2.5% in 2018/19. We are not basing this forecast on the efficacy of tax cuts or any other policy initiatives. The intrinsic momentum in the economy has been building up over several years, in our view, and is in shape to grow comfortably for the time being, despite the length of the ongoing expansion.
Meanwhile, the Japanese economy has finally returned to steady growth after a prolonged slump. GDP growth has stayed at about 1% for three consecutive years since 2015. We expect growth to remain at 1.1% in 2018 before easing to 0.9% in 2019, lower than the peak of 1.6% in 2017 but still close to the trend.
Recovery in the Eurozone is likely to stay broad-based as firm domestic demand combines with an improving trade balance. Investment spending and household consumption remain the main contributors to headline growth, propped up by a pick-up in the capacity utilisation rate and encouraging confidence surveys. Low borrowing costs and easier lending standards have lifted industry’s credit growth, which comes at a time when the bloc’s governments are scaling back fiscal support. Households, meanwhile, continue to benefit from benign inflation, which has propped up real incomes. While growth remains strong, inflation is below the 2% target, with the 2018 average forecast at 1.5% and 1.2% in 2018, the latter to be weighed by adverse base effects.
The ongoing economic momentum will readily carry over Asia into a strong start in 2018, in our view. Asia’s open, electronics-exports-oriented economies have delivered a string of strong data in recent months, allowing for several rounds of forecast upgrades. Indeed, except for India, all the Asian economies we track will likely beat our year-ago forecasts by 50-150bps.
2018 is likely to be characterised by further removal of monetary stimuli by the Fed, the European Central Bank (ECB), and, to a much smaller extent, the Bank of Japan (BOJ). Faced with a global cyclical recovery, elevated asset prices, nascent inflationary pressures, and risks of higher oil prices, G3 central banks now have more compelling reasons to tighten monetary policy. Support for developed-market bonds is waning.
Net liquidity injection into the global financial system could drop to zero by end-2018. The Fed is on track to shrink its balance sheet by US$50bn/month by the end of 2018. The ECB is scheduled to taper purchases to EUR30bn/month in January and this programme could be scaled down again in October or terminated entirely. Meanwhile, the BOJ does not seem intent on keeping to its JPY 80trn/year asset-purchase target.
We are looking for the US dollar to recover in 2018 after its weak performance in 2017. The three Fed hikes that we forecast for 2018 will be accompanied by an increase (and not a softening) in US 10-year bond yields to 2.85% by end-2018. The Fed will unwind its balance sheet at an incremental pace. The Fed, under a new Chairman (Jerome Powell), will be working to ease regulations for US banks to provide “credit to families and businesses to sustain a prosperous economy”.
Asian currencies are unlikely to witness another year of strong appreciation pressures from robust export-led growth in 2017. Growth in Asia will be slower and more broad-based, with deleveraging in China posing downside risks. Rising oil prices and higher US interest rates will be a concern for some countries. In India, the trade, current account, and fiscal deficits have widened amidst higher inflation. The Philippine economy is under watch for overheating risks. Don’t expect the same level of exchange-rate stability in Indonesia and Vietnam.
We expect Asian equities to deliver gains yet again in 2018. A global recovery scenario should continue to boost earnings, which has been the key driver of valuations in Asian markets in 2017. Now that there is greater confirmation of and confidence in central banks’ programme of balance-sheet reduction, we expect gains in Asian markets to be more broad-based.
The Asian growth story remains intact. Event risks arising from geopolitical conflicts, European elections, noise from the Trump administration, and central banks’ tightening policies could sap risk appetite but they won’t be enough to derail the upward momentum. Until markets start to price in excessive earnings growth, and confidence and trust are impacted by policy mistakes, markets should trade higher into 2018
To read the full report, click here to Download the PDF.
The information published by DBS Bank Ltd. (company registration no.: 196800306E) (“DBS”) is for information only. It is based on information or opinions obtained from sources believed to be reliable (but which have not been independently verified by DBS, its related companies and affiliates (“DBS Group”)) and to the maximum extent permitted by law, DBS Group does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions and estimates are subject to change without notice. The publication and distribution of the information does not constitute nor does it imply any form of endorsement by DBS Group of any person, entity, services or products described or appearing in the information. Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment or securities. Foreign exchange transactions involve risks. You should note that fluctuations in foreign exchange rates may result in losses. You may wish to seek your own independent financial, tax, or legal advice or make such independent investigations as you consider necessary or appropriate.
The information published is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into any transaction in any jurisdiction or country in which such offer, recommendation, invitation or solicitation is not authorised or to any person to whom it is unlawful to make such offer, recommendation, invitation or solicitation or where such offer, recommendation, invitation or solicitation would be contrary to law or regulation or which would subject DBS Group to any registration requirement within such jurisdiction or country, and should not be viewed as such. Without prejudice to the generality of the foregoing, the information, services or products described or appearing in the information are not specifically intended for or specifically targeted at the public in any specific jurisdiction.
The information is the property of DBS and is protected by applicable intellectual property laws. No reproduction, transmission, sale, distribution, publication, broadcast, circulation, modification, dissemination, or commercial exploitation such information in any manner (including electronic, print or other media now known or hereafter developed) is permitted.
DBS Group and its respective directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned and may also perform or seek to perform broking, investment banking and other banking or financial services to any persons or entities mentioned.
To the maximum extent permitted by law, DBS Group accepts no liability for any losses or damages (including direct, special, indirect, consequential, incidental or loss of profits) of any kind arising from or in connection with any reliance and/or use of the information (including any error, omission or misstatement, negligent or otherwise) or further communication, even if DBS Group has been advised of the possibility thereof.
The information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. The information is distributed (a) in Singapore, by DBS Bank Ltd.; (b) in China, by DBS Bank (China) Ltd; (c) in Hong Kong, by DBS Bank (Hong Kong) Limited; (d) in Taiwan, by DBS Bank (Taiwan) Ltd; (e) in Indonesia, by PT DBS Indonesia; and (f) in India, by DBS Bank Ltd, Mumbai Branch.