Thanks to the synchronised global recovery taking place in an environment of ample liquidity, 2017 has been “the right year to do not all that much”, Foster admitted. “It’s been like driving on very smooth asphalt – you engage your cruise control and had a great year.”
Next year, by contrast, will feel “very dramatic” and volatility is likely to “pick up quite significantly.”
Though investors remain convinced that Brexit or a slowdown in the US are the two biggest threats to keep an eye on, Foster posits that more sluggish money supply growth is the real one to watch.
In this latest market cycle, China, not the US, has contributed more to global gross domestic product (GDP), meaning “it’s influence is a lot greater”. And looking at the global money supply growth in real dollar terms, the G5 economies of Brazil, China, India, Mexico and South Africa have generated $9.1bn, $3.8bn of which has come from China. The eurozone has also been a strong contributor, producing around $4.3bn of real M1 growth.
In fact, “all the money supply growth is coming from China and Europe”, said Foster and with current GDP forecasts pointing to relatively weaker growth ahead, “we should expect both of them to come down a bit”.
And while the correlation between money supply growth and the performance of global equity markets isn’t always a perfect match, he thinks there is reason to believe that 2018 will be a bumpier ride for investors.
“What it means to me is that the smooth asphalt we have been running on this year ends up being lumpier next year,” Foster speculated. “With volatility close to all-time lows in 2017, it’s going to pick up, and I would just suggest it’s going to pick up quite significantly.”
However, Foster doesn’t think we’ll see the “difficult, big bear” markets of recent history either.
“Ultimately, there isn’t the same level of overcapacity and over-investment, and there isn’t the same impetus to really tighten policy,” he said.
Instead, what we are seeing is “a withdrawal of the super loose monetary policy. Without inflation picking up, there is no reason for interest rates to be going anywhere near 5%. Without higher interest rates, ultimately investors are going to think that equities provide tangibly better valuations and returns than any other asset class.”
Nor does it mean that investors in 2018 will be short on buying opportunities. In particular, the prospect of a “wobble” in global growth could provide a much-needed boon for those looking to get into the currently overcrowded eurozone and emerging markets. In other words, it’s a good time to make contrarian calls.
The higher emotional state “will mean people adjust their positioning a lot”, said Foster. “Being able to escape from the very crowded areas of Europe and the emerging markets before a growth wobble will be a relative opportunity, and, then, those areas can overshoot so investors will get an opportunity to get back in. Ultimately, I don’t think the trajectory changes, it’s just the wibbly wobbliness around the area.”
