Volatility has increased in early 2018, and the prospect of a faster-than-expected rise in inflation and bond yields is weighing on markets. Our investment forum panellists, whilst still generally comfortable with markets, are more alert to the building risks.

Four key themes emerged from the forum:

Equities can continue to deliver solid gains in 2018

Equities, for now, remain the preferred asset class for 2018. However, gains will likely be more moderate than last year, and will come with higher volatility. Valuation was seen to be a more important driver of performance in the year ahead, and investors must remain alert to the risks of inflation and higher bond yields. The pace at which yields rise was seen key to the extent this could challenge equity returns.

Investment-grade credit remains a reasonable place to invest

When yields rise, credit spreads are typically more susceptible to underperforming. However, given the strong macro conditions and low default rates, investment-grade credit remains a reasonable place to invest. However, caution was needed in relation to non-investment-grade debt, and particularly in those countries and sectors exposed to high levels of leverage.


Emerging markets still favoured for their attractive valuations

Despite a very strong 2017, emerging markets are still favoured for their attractive relative valuations and superior earnings profiles. With global growth being increasingly driven by rising industrial activity, infrastructure and business investment, this is likely to be supportive for earnings momentum.

Australia will continue to lag the global cycle

Australia remains an economy in transition. While jobs growth is strong, housing is slowing and low wage growth has muted consumer spending. Reflecting this, company earnings growth is likely to be less buoyant than in offshore markets, although bond yields are likely to rise less materially than offshore.