How do you explain the equity markets’ good performance last year?
The global economy picked up pace and reached its fastest rate of growth since the crisis, with a particularly marked improvement in the eurozone. This growth spurt did not bump up inflation. In almost all industrialised countries, inflation came in below the central banks’ targets. Despite the US Federal Reserve’s monetary policy tightening, the central banks have persevered with their accommodative policies and cash injections. Contained inflation and very low short-term interest rates prevented bond yields from rising. To sum up, global growth accelerated in 2017, with an upward revision of corporate earnings’ estimates but no rise in interest rates.
What risks are the markets exposed to?
The risks include a potential slowdown in economic growth, a sharper-than-expected rise in inflation, a faster-than-anticipated change in the central banks’ monetary policies, and rising bond yields.
What is the long-term outlook for the equity markets?
The central banks’ monetary policies have generated an artificial boom in financial assets. In so doing, they have created a situation in which the medium- and long-term yields to be expected from shares and bonds are very low, and in which the risk of a slump, in the event of a downturn, could prove severe. Investors have been enjoying the wind in their sails for several years but could be facing some stiff headwinds in the future.