Profits And Pitfalls For Expat Investors In 2018

The year ahead looks promising for expat investors, but political uncertainty may well create pitfalls.

Admittedly, the start of 2018 does look promising, with tax cuts in the USA, an improvement in global growth and news that central banks are loosening their monetary policies, but is this the calm before the storm? Of course, financial advisors are urging their clients to continue investing, making much of the well-worn phrase ‘history demonstrates markets only go up in the long-term’, but with increasing unrest and political chaos worldwide, forecasters are urging caution.

Continuing optimism could be dampened down by three factors, inflation, the Trump effect on free trade and a slowing in China’s economy. Inflation has been under control during the last few years, and is now remarkably low, in spite of falling unemployment figures across the world’s major economies. Wage increases in 2018, especially in tight labour markets, could cause a significant rise in inflation figures causing banks to either withdraw quantitative easing or raise rates. Should this happen, government bonds would weaken although equities would be protected at least until increased interest rates curb borrowing and consumption falls as a result.

Free trade has been in Donald Trump’s sights since before the US’s disastrous presidential election, and is expected to still be a focus for both individual and collective trade agreements. Protectionism hits on inflation and prices, raising both and causing Treasury prices to fall and yields to rise, thus affecting global bond markets. Risk assets will take a larger hit as investors switch to higher bond yields.

As usual, the elephant in the room is China’s economy, now being re-oriented by its lifetime president Xi Jinping away from rapid growth focused on exports and infrastructure investments to household consumption and services. As a result, the government may be reluctant to bankroll leveraged investors or prop up failing industries. Entrepreneurial confidence may be dented by increased state control, and any slowdown in China’s economy may slow global demand, thus increasing fears of global deflation.