OpinionJan 9 2018

More stock market records ahead for 2018?

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More stock market records ahead for 2018?

M1 money supply essentially refers to liquid cash and this is generally created by the combined actions of policymakers and banks. Although the developed world’s central banks have been infamous for the stimulus they have imparted, more recently China has been the most aggressive chaser of growth.

During the financial crisis, Chinese banks embarked on a lending spree to sustain its economic growth. But our research shows that, in 2016, China’s policy was even looser, resulting in a glut of M1 money entering the global economy.

As a combined result, total debt to companies and individuals in China has risen from $6trn during the financial crisis to around $28trn at the end of last year.

That took its debt from 140 per cent of GDP to 260 per cent of GDP over the same period and makes China’s companies the most highly leveraged in the world.

The real challenge for investors after an environment of very low volatility is that they may be unnerved.

Another consequence of this lending was to boost the amount of cash in the global economy; in the latest market cycle, China has contributed nearly half the M1 money supply growth in the world.

The Eurozone is responsible for most of the rest with the US barely contributing. This means that China is now a bigger contributor to global GDP and money supply growth than it has ever been, meaning it has a proportionately greater influence on global markets.

After winning re-election, President Xi Jinping has said he wants to address China’s huge debt, so we expect China to continue raising interest rates and introducing capital controls to stop money leaving the country.

Not only might this slow the Chinese economy, it should reduce its contribution to M1 money supply this year, which in turn would mean less money available for investment in global equities. That is a recipe for volatility and potential market corrections.

Also in the mix are concerns about Brexit, which could easily unsettle markets (although they said that about 2017 too), and possibly a slowdown in the US, although strong corporate profits and Trump’s pro-business agenda could extend the US bull run still further.

With all this in mind, investors should be optimistic for 2018, but prepared for a few more bumps in the road along the way.

As Brexit matures, US rates continue to rise and the world sees a possible tightening of liquidity through the money supply, it may be that the investing “highway” feels a little less like the smooth tarmac of 2017 and more like driving off-road as this cycle hits its peak.