The beginning of a new year provides the customary juncture for both reflection and prediction.
This time last January, Heartwood Investment Management made its economic and investment predictions for 2018 and beyond, and now investors once again look to the future.
But before we look ahead, it may be worth reviewing our track record for the year behind us.
For example, last January, Heartwood IM correctly suggested a global recession was unlikely in 2018. This may have seemed an obvious statement, but at the time plenty of commentators were highlighting the long length of the current global economic expansion.
Heartwood did say the current cycle would likely change shape, and so it has proved, with a shift away from central bank support to government stimulus.
We also predicted that business investment in developed economies would rise, which it did, although it is far too soon to say whether productivity has been lifted as a result.
In China, Heartwood IM underestimated the damage that prior deleveraging efforts would do to economic activity. Some of the weakness in China and emerging markets is, of course, due to US import tariffs – not a risk that was fully envisioned in 2017.
Indeed, protectionist threats and actions have been the single most important negative surprise in 2018.
Another theme identified last January was a rise in inflationary pressures, which were uneven across the major economies, but most pronounced in the US.
Where it was felt inflation would not accelerate was in the UK, and indeed we have seen UK inflation fall, albeit only marginally.
However, the yields on UK government bonds have not fallen in tandem, rather they have responded to rate hikes from the Bank of England (in November 2017 and August 2018), as well as being dragged higher by other bond yields around the world.
A year ago we harboured concerns about what less accommodating central banks would mean for economies and markets.
The march higher in US interest rates, global bond yields and the US dollar have indeed conspired to restrain global financial conditions, thus challenging investor sentiment.
The extent of the restraint has, however, been somewhat surprising – 2018 has been among the worst years on record for investment returns across a wide range of asset types, with few places for investors to hide.
So, while it was right to say risk-adjusted prospective returns would be lower in 2018 than 2017, we were too optimistic in thinking that global equities would come through relatively unscathed.
Or, to put it another way, we diagnosed the issue of investor complacency, but the actions we took did not go far enough.
What next for the global economy?
The current cracks in the global economy could grow into fissures, like in 2015, or crevasses, as in prior recessions. The presence of these cracks has less to do with the US economy at the moment and more to do with the rest of the world not contributing.