What's in store for investors in 2018? - Lloyds Bank
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What’s in store for investors in 2018?
If the previous 18 months brought political upheaval, the next could
bring an equally significant shift in the financial landscape.
With inflation and interest rates starting to lift off their historic lows this
could fundamentally affect portfolios for a huge range of investors.
In the following short outline, we consider what those changes
might be, and where investors could consider looking for potential
opportunities in a turbulent world.
SPENDING
Inflation could be RISING INTEREST RATES
on the rise on the increase
AGEING Inflation and interest rates have Meanwhile, with President Trump pushing
The target rate of inflation in The trouble is, that particular basket of goods
CENTRAL BANK TARGET
his “America first” policy and other
been very low for a long time. the UK is 2.0%, so the Bank of might not show the whole picture. It doesn’t
countries adopting a similarly separatist
TRADE BARRIERS INTEREST RATES SINCE 2007
POPULATIONS
include some of the online purchases that
That is just starting to change approach, the barriers to international England is now starting to bring many people make, so the true level of
for a number of reasons. trade are increasing. This also sends the
costs of imports up and discourages INCREASING interest rates up from their
historic lows.
inflation might be even higher than the
official statistics suggest.
7%
US Eurozone UK Japan
The number of people available for work international trade. 6%
is falling. With fewer potential employees What’s more, there is a delay of several
available, there is pressure on employers
But there’s a twist. 5%
months between a central bank making
to offer higher salaries in order to fill roles. In the UK, the situation is even The current measure of inflation compares an interest rate change, and that change
4%
High salaries mean both higher costs for taking effect by helping to limit borrowing
more pronounced because the
FALLING
how much a set basket of goods costs
the employers and more spending money and spending and, as a result, slowing 3%
value of the pound has fallen today against what that same basket of
for employees. These factors combine to inflation down.
goods cost one year earlier. So if the basket
increase costs and prices. since the Brexit vote in June 2016
CENTRAL BANK of goods cost £100 last year and now
2%
making imports more expensive.
STIMULUS costs £103, then inflation is at 3%. To put
Therefore, the Bank of England 1%
FALLING
it another way (which helps to explain the
implication for investments) £100 buys less has to estimate what is likely 0%
This meant inflation in the UK reached this year than it did last. to happen, and take action in
UNEMPLOYMENT 3.0% in September 2017, a significant
increase on its -0.1% rate two years earlier. the knowledge that the effects
-1%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
of such action will take time to Source: Bloomberg, September 2017.
make a difference.
SAVING Forecasts are opinion only, cannot be guaranteed and should not be relied upon when
FALLING making investment decisions. The forecast of future performance is not a reliable guide to
actual future results. Past performance is not a guide to future performance and the value of
investments, and the income from them, may fall as well as rise.BAD NEWS FEWER BUYERS
for bonds INFLATION &
INTEREST RATES
of bonds
Many investment portfolios
Meanwhile, as interest rates rise, CENTRAL BANK UP In addition to changing interest What’s more, since the financial
BOND-BUYING &
include bonds as they are often rates, central banks have also crisis, increased regulation has led
other investment opportunities to those commercial institutions
used to provide an income been buying huge quantities
BOND PRICES
such as bank savings deposits reducing the amount of bonds that
stream or a relatively low-risk of bonds on the secondary they had been buying.
DOWN
might increase the returns
rated asset. Unfortunately, market. This was done in order
that they pay, potentially While central banks continued to buy
rising inflation and interest to help make money available lots of bonds, that wasn’t a problem. But
making them more
rates can undermine the to businesses and people now that the global economy has staged
attractive than bonds.
returns provided by bonds. wanting to borrow during the something of a recovery and inflation
could rise, central banks are either looking
This is because most bonds pay a fixed aftermath of the financial to reduce the amount of bonds they are
Bonds can be bought and sold in much the
return or “coupon”. If this coupon were, same way that company shares can. So if crisis when many banks were buying (as is the case with the European
say, £3 a year on a £100 bond, then that investors expect interest rates or inflation unwilling or unable to lend. Central Bank) or even start selling the
£3 a year will not change regardless of to rise, then they might be less keen on bonds that they own (which is what the
whether interest rates or inflation rise bonds as a potential investment. This fall Federal Reserve in the US is doing).
or fall. in demand leads to a fall in the price that This meant that central banks This, too, will contribute to downward
investors are prepared to pay for bonds.
As inflation rises, that £100 and replaced commercial institutions pressure on bond prices.
annual payment of £3 becomes worth less In short, the value of those bonds as the biggest buyers of bonds.
more quickly in terms of what it can buy. could fall.
Forecasts are opinion only, cannot be guaranteed and should not be relied upon when
making investment decisions. The forecast of future performance is not a reliable guide to
actual future results. Past performance is not a guide to future performance and the value of
investments, and the income from them, may fall as well as rise.IMPLICATIONS Potential
for investments BEYOND BONDS OPPORTUNITIES
Not all bonds will be affected Also, the outlook varies across different Inflation and interest rates might be the big story That said, there’s no avoiding risk when Elsewhere there are potential opportunities albeit with
regions. For example, UK government
in the same way. The longer as far as financial markets are concerned, but considering investments. For example, likely high risk. For example, we favour companies in
bonds are considered by many to be fully countries that have political stability, positive reform
the repayment period left on a valued and unlikely to rise in price much there are plenty of other issues to keep in mind, if an investor were to cash-in all their programmes and solid economic prospects, which
bond (known as its “duration”), further. In contrast, some international not least of which is politics. investments, that cash would become could include the likes of China, India and Argentina.
bonds might offer better prospects,
the more likely it is to be less valuable over time because of Having considered such countries in the initial search,
though the levels of risk associated with The UK is undergoing sometimes fractious negotiations over its departure we would then favour shares in companies that have
affected by changes in interest any alternative would have to be taken from the European Union, US President Donald Trump has yet to persuade inflation and, as we have seen, with good risk profiles, cash-flow and order books.
rates or inflation. Therefore, into account by an investor. Congress to accept any of his reforms on immigration, healthcare and inflation potentially on the rise, that
we expect to see a shift among taxation, while Catalonian separatists have shaken the stability
of Spanish politics.
could be an increasing risk.
investors towards shorter Sniffing out companies that fulfil
So, we anticipate that there
duration bonds. The potential for politics to create So where might there be such a demanding set of criteria
might be better prospects in further turbulence in economic investment opportunities? takes a great deal of research.
2018 for bonds issued by select markets remains as strong as ever.
international governments with As a result, we favour a cautious In the developed economies, we still see potential for
approach to investing over returns in Western Europe, North America and Japan. That’s why we choose to work with specialist
political stability and positive the coming year, with a active managers to find opportunities. This is
However, after sustained growth in stock values across
economic prospects. readiness to withdraw some these regions, we feel that the potential for further something that we do not see in passive funds (those
investments should the growth might not be quite as substantial as it was at the that typically track an index and the stocks within it)
political climate worsen. beginning of 2017. that, by their nature, blindly follow a usually broad
sweep of companies or countries.
Forecasts are opinion only, cannot be guaranteed and should not be relied upon when
making investment decisions. The forecast of future performance is not a reliable guide to
actual future results. Past performance is not a guide to future performance and the value of
investments, and the income from them, may fall as well as rise.CONCLUSION
In summary then, as well
as the political uncertainty,
we see an increased risk of
rising inflation. This could Important information
lead to a broad increase Forecasts are opinion only, cannot be guaranteed and should not be relied upon when making investment
in interest rates across decisions. The forecast of future performance is not a reliable guide to actual future results. Past performance
is not a guide to future performance. Investors may not receive back the full amount originally invested and the
western economies. value of investments, and the income from them, may fall as well as rise.
No representation, warranty, express or implied, or undertaking is given or made as to the accuracy,
These factors lead us to believe that
reasonableness or completeness of the contents of this document or any opinions or projections expressed
the outlook for bonds is less positive herein. Investment markets and conditions can change rapidly and as such the views expressed should not be
than before, though should there be a taken as statements of fact, nor relied upon when making investment decisions.
“hard” Brexit, UK government bonds Any views expressed within this report are our in house views as at October 2017 and should not be relied
might benefit from investors seeking a upon as fact and could be proved wrong. The information contained in this document has been derived from
low-risk rated investment opportunity. sources which we consider to be reasonable and appropriate. This document may not be used, copied, quoted,
circulated or otherwise disclosed (in whole or in part) for any other purpose without prior written consent.
However, there are potential
opportunities offering more attractive
returns in both bonds and equities
More information
overseas. We believe that the chances To find out more about our thinking, Lloyds Bank plc. Registered Office: 25 Gresham Street, London EC2V 7HN.
of delivering positive returns are ask your Private Banking and Advice Registered in England and Wales no. 2065. Authorised by the Prudential Regulation Authority and regulated
by the Financial Conduct Authority and the Prudential Regulation Authority under number 119278.
greatly increased through in-depth Manager for a copy of the full 2018
research across a range of stocks and Outlook document. Alternatively,
bonds, something that we do not see you can download a copy from
being offered by passive investment lloydsbank.com/outlook2018
opportunities.
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