ACA Predicts the Landscape in 2018

Following 18 months of Brexit uncertainty and wavering markets, 2018 begins with a more positive outlook for the future; the news is filled of reports of record stock market growth, a decline in unemployment and predictions of prosperity from the World Bank. Are we right to expect good times in the near future, or is this all merely new year hopeful positivity? Alexander Charles Associates gives its predictions for 2018 and the mood is a little more circumspect, we’re opting for cautious optimism.

The Good News

The stock markets opened in 2018 by hitting record highs, according to a news article from the BBC (http://www.bbc.co.uk/news/business-42579028) there are three key reasons for this ‘Goldilocks’ moment. Firstly, gentle recovery in economic growth is taking place (increasing demand for products) across the major drivers of the world economy, namely America, the Eurozone and Japan coupled with the emerging Asian markets; secondly, continuing stable expansion in China and thirdly, an apparent lack of increasing inflationary pressures, meaning interest rates are likely to remain at close to historically low levels. Further good news comes from the World Bank but it is tempered with concerns about the long-term view. The Bank’s latest forecast reveals that growth is likely to speed up this year, especially as is was stronger than expected in 2017; predictions indicate that the world economy will expand by 3.1% during 2018 before slowing slightly, meaning any gains in living standards and poverty reduction is likely to be at risk in the longer-term. In the 3rd quarter of 2017 we reported on the record UK employment levels (https://alexander-charles.co.uk/uk-experiences-highest-employment-levels-since-records-began/) which remained at the 75.1% high throughout the August to October 2017 period. Of particular interest in the UK job market is the manufacturing sector, the output is expanding at its fastest rate since early 2008 after recording a seventh consecutive month of growth in November. Renewable energy projects, boats, aeroplanes and cars for export helped make output 3.9% higher in the three months to November than in 2016. The Office for National Statistics further shows that industrial output rose by 0.4% in November.

The Bad News

Whilst manufacturing output growth is picking up speed, construction output in the three months to November fell by 2%, compared with the previous three months (the industry’s biggest quarterly fall since August 2012) with the only positive aspect being a 1.2% increase in new housing. The growth in current car manufacturing may also be short lived as following the example of the French government, Britain is to ban all new petrol and diesel cars and vans from 2040 amid fears that rising levels of nitrogen oxide pose a major risk to public health. The financial sector continues to be affected by Brexit uncertainty, the mass panic some predicted didn’t occur but firms continue to operate with caution especially in the case of private equity. This week Lyceum Capital (UK mid-market investor) called time on its current fundraising effort and they have decided that future investment will be on a deal-by-deal basis. This will mean job cuts at the investor, but it may also be indicative of a wider issue as investors operate more cautiously whilst Brexit negotiations are ongoing. The Brexit process continues to be shrouded in uncertainty with the chair of the Treasury select committee currently seeking clarification from HMRC regarding the proposed new VAT rules and their implications, as part of the new Customs Bill which plans to change how imports from the EU will be treated post-Brexit. The Bill is due for its second reading in the House of Commons next week.

On Balance

Whilst 2018 is not likely to be all doom and gloom, and there will be opportunities to prosper, cautious optimism is advised. The current period of boom in certain sectors and markets may not remain stable in the longer term; similarly, the lack of clarity on the Brexit process has led to very short-term planning as investors feel unable to predict long-term trends in such a climate of uncertainty.