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2018 Investment Outlook
The surging markets of the past year have taken place against a backdrop of macro developments whose long-term impact on the world economy has yet to be realized: uncertainty regarding the UK’s withdrawal from the European Union, potential tax reform in the US, North Korea’s nuclear weapons testing, continued oil price volatility and the outcome of key elections in Germany, France, Iran and other countries.
With this as context, the year ahead promises to be interesting and challenging as well. In this dynamic environment, we have a strong view that clients are best served by portfolios that combine the advantages of active, passive and alternative capabilities.
At Invesco, we’ve built our firm over many years with a single focus: to help clients achieve their investment objectives in a variety of markets. We provide a comprehensive range of investment capabilities, delivered through a diverse set of investment vehicles. We draw on this comprehensive range of capabilities to provide customized solutions designed to deliver key outcomes aligned to client needs, which are our most important benchmark.
Our experienced investment teams are located in locations all over the globe, which we believe is a real strength of the firm. Maintaining a presence on the ground in key cities enables our investment teams to stay close to developments that impact the markets and the companies in which they invest.
An important part of achieving your investment objectives depends on keeping ahead of the dynamics that drive movements in the global markets. Working with our investment teams, we’ve developed this 2018 outlook to provide insights that can help you plan for the future and make decisions about your investments.
We hope you find this information helpful. As always, we remain focused on helping clients achieve their investment objectives – wherever the markets take us.
UK general election: Ruling party dismay at loss of majority
On Friday night (9 June 2017), British election delivered a blow to the ruling Conservative party, who lost their Parliamentary majority. The final outcome will likely leave the Conservative party with 319 seats compared with the Labour Party’s 261 seats, resulting in a hung Parliament (326 seats is the minimum requirement for a majority in the 650-seat Parliament). This is all against the background of the upcoming Brexit negotiations scheduled to begin on June 19.
British Prime Minister, Theresa May called for a General Election six weeks ago to increase the Conservative Party’s Parliamentary majority from the 331 seats they held prior to yesterday’s election. In addition, it was widely believed that the leader of the Labour party, Jeremy Corbyn was unelectable, given how far left his political policies were. However, as the election neared Corbyn proved to be surprisingly effective and his policies became increasingly popular.
Asian Insights Q1 - 2017
2017 so far has seen equity markets in Asia off to a positive start, and as a result, global investors are gaining more confidence in their outlooks. Along with global markets, Asian equities have moved forward in parallel led by economic sensitive sectors, while dragged by defensive sectors.
As the year progresses, we believe three key areas may have an impact on Asian equity markets: an improvement in profitability for Asian corporations, spurred by growth in certain sectors; global policy uncertainties impact to Asia will not be as significant and has been exaggerated by the market; and the myth of reflation, at least for the case of Asia.
China’s Party Congress 2017: Achieving balanced growth economy
The Chinese Communist Party Congress holds every five years has begun in Beijing on 18th October, which will determine China’s top leadership and set out the top policy agenda for the country for the next five years. This is the most important political event of the year, as the Congress consolidates President Xi’s core leadership into his second term in office.
What we think…
This Congress marks a defining moment in the history of China. It is expected that enhanced centralization of power forms a solid foundation for Xi to pursue a balanced growth economy by steadily moving towards structural reforms. Deleveraging remains high on the agenda. State-owned reform is another focus, and could even see acceleration in coming years. Amidst the bigger agenda of promoting a balanced growth economy, Xi’s government will put in more checks and balances which will ensure stability and growth sustainability for the next decade and beyond. Internationally, China’s solidified political status sets the stage for Xi to build his legacy, notably the Belt & Road initiative, raising the status of China in the world stage.
Deleveraging remains key focus
We believe the Chinese government will remain committed to bringing down leverage. We expect robust momentum in carrying out deleveraging after the Congress. This includes ongoing policy tightening in the financial industry to rein in irrational credit growth, which we have already seen intensified. Year-to-date, China’s regulatory bodies have further clamped down shadow financing via wealth management products (WMP). Encouragingly, we have seen signs of progress. WMP, as a proxy, peaked out in 2016 and modestly contracted in recent periods. Looking ahead, we believe the government will continue with the 3-step approach:
SOE reform to accelerate
In our view, China’s overall debt problem is centered around the rapid growth of debt in the corporate sector, which has nearly doubled since 2007. It is estimated that two-thirds of corporate debt are related to State Owned Enterprises (SOE). SOE reforms involve many stakeholders and has to go hand-in-hand with deleveraging. A consolidated chain of command for Xi allows scope for a faster and wider scope of execution. The center of SOE reform is to ultimately improve profitability by gaining competitiveness. One of the highlights is to introduce mixed-ownership, by attracting private capital into SOEs. Supply-side reform is another key aspect. We expect more disciplined supply-side control which will eventually improve earnings potential for SOEs.
More checks and balances
Our view is that Xi’s government will continue with the ‘check and balance process’ they have put in place prior to the Party Congress. Over the past year, there has been stepped up efforts on three fronts: 1) slowing down reckless leveraged corporate acquisitions, 2) cutting down excess capacity/leverage, 3) Continuing the anti-corruption campaign. All these initiatives and actions taken are in line with the promoting of a balanced growth economy, which will ensure stability for the next decade and beyond.
Xi’s legacy and China’s global footprint
Xi will further build his legacy as he transitions to the second term. With further political power amassed domestically, we expect the second term will see the further strengthening of the mega initiatives to expand China’s global footprint. The Belt & Road (B&R) initiative – which Xi initiated in his first term in office – is the world’s largest infrastructure program over the past century, raising China’s influence across three continents: Asia, Europe and Africa. With China at the center of the international stage, the B&R initiative covers 70% of the world population and 75% of the world’s known energy supplies1.
Conclusion: Strong political leadership to continue
The Party Congress is mainly a political event which will focus on big-picture themes and political ideology. That said, the affirmation of power consolidation for President Xi is supportive of market sentiment in the near term. We expect the government’s policy stance to remain broadly stable after the event, while the market will further await specific policy details. In our view, the Congress marks a defining moment in the history of China. Over the past few years, China has progressed well with the building of a ‘moderately prosperous’ society – a vision laid down in 2015’s 13th 5-Year Plan. We believe President Xi’s strong political leadership is set for even greater things to come.
1Source: Bloomberg News, as of 11 October 2017
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