Thoughts for 2018 and beyond
Anyone who is investing is not going to do so just for a year so these are some of my key thoughts that dominate my own thinking in where to invest.
Last year 10 year yields of the worlds second largest economy backed up 100bp and now stand at 4.05%. (Not bad for a AA rated credit with a balance sheet surplus) This compares to US 10 yields that Huffed and Puffed and did nothing closing out at 2.45% (It is a deficit country forecasting and enacting an even larger deficit).
It's inflation rate is now RISING and according to Diana Choyleva of Enodo Economics (Perhaps the best economic Chinese Tea leaf reader there is) going from the official CPI number of 1.7% to reflect what is seen elsewhere in Producer Price Inflation +5.8%, producer goods inflation 7.5%,and consumer goods +0.6%. Even according to Diana the GDP deflator was +4.5% in the third quarter (She thinks the real number is 6.4%). So its in the pipeline and coming to a retail price near you. It may be held back in the short time by some regulated pricing barriers. So China unlike the past period of economic history over the last 10 years is no longer exporting deflation but exporting Inflation to the world. This gets accentuated further as the performance of the Offshore Renminbi against the USD is +7.00% on the year.
South East Asia/ Asia
According to the Asian Development Bank ASEAN Growth in 2017 was +5% and will maintain or increase that level in 2018. The region especially when you include other countries remains the engine of growth to the world at this time. Goldman Sachs sees higher growth through out the region but Inflation moving to the top end of Central Bank tolerance.
The Old World
So for Europe and the USA here comes exported inflation from far east manufacturing and higher world commodity prices. So inflationary pressures are going to be eating into individual incomes in tightening labour markets. Wage pressures are going to grow. This will translate in to steepening yield curves with talk by the year end of 4% 10 year US bond yields and 3% in the UK. The current ride in equities will continue but you are rising the crest of a wave that is approaching a steepening beach of a yield curve.
The Very Old World
If, like me, you live in the UK don’t invest here. Ignore the Brexit noise as it is a distraction and will end up as a compromise resolution. The main threat to society is the effects of the rapidly ageing population and the strains that is putting on the key support systems which are not being addressed by the myopic concentration on Brexit.
Pension Auto Enrolment for up to 8 million people (working population around 34 million) on the minimum pension contribution will see 2% more of their pay go into their pension from April this year followed by a further 2% in April 2019. That is a lot of discretionary spending power in a world with increasing inflationary pressures being taken out of the economy.
According to The Government Actuary’s Department in a recent review (dry stuff but someone has to read it) the National Insurance Fund which has to pay the state pensions will go in to deficit in the life of the next Parliament (around 2026) and will be exhausted by 2033. Using ONS numbers we will have 44 million potential workers supporting 14.5 million oldies (Over 65) out of cash flow in 2033. Those in work will also have to pay indirectly the unfunded portion of the state related retirement funds of individuals. Currently estimated at £1.6 trillion by the ONS. Then if you add in the cost demand pressures on the health service of having over 8 million people over 75 by 2033 versus 5.5 million now and you can see my concerns to be invested here. Enjoy living in this green and pleasant land but don’t back your savings in it. Also expect to be traveling abroad to see your grandchildren as your children may see a brighter future elsewhere.
We are living on borrowed time not looking at the problem of unfunded pension funds.