There’s reason for investor optimism in 2018—so long as it’s tempered with caution.

Read: Synchronized global growth favours equities, but risks lie in wait

That message comes from Nigel Green, founder and chief executive of deVere Group. In a release, he says 2017’s “steady and climbing markets” will continue into the new year. “However, investors need to keep an eye on several key factors over the next 12 months that could increase turbulence.”

Let’s consider the good news first. Here are his top three drivers for 2018 optimism:

1. Growth puts the pedal to the metal. “Global GDP growth is speeding up,” says Green, adding that growth is balanced across the globe. “Strong GDP growth is translating into good corporate earnings growth, which supports share prices.”

Read: Global economy has ‘room to run’ in 2018: BlackRock

2. Interest rates remain at historical lows. While the Fed and Bank of England are expected to hike rates in 2018, the effect is one of removing accommodation rather than tightening. With rates remaining relatively low, “cash will remain an unattractive asset class, and bond yields will continue to be slender,” says Green. “We can expect this to further boost stock market indices.”

3. U.S. tax reform becomes a reality. “Tax cuts in the U.S. could help boost the American economy and stock market which, in turn, will positively impact global economic growth and global stocks,” he says.

Read: How U.S. tax reform threatens Canadian corporates

Now for the headwinds. Here are Green’s top three risks to monitor:

1. Potential inflation. In 2018, tight labour markets could result in wage increases and, in turn, inflation. “If so, central bankers will have to markedly tighten policy,” he says. That would be bad for government bonds, but good for equities, which can “pass on inflation to the consumer, in higher selling prices. Eventually, though, they too will suffer as higher interest rates curb borrowing and investment, and consumption falls in response.”

2. Loss of free trade. Green notes Trump’s negative view of multilateral trade agreements, and its consequences. “Protectionism leads to higher prices and inflation, leading to a sharp fall in Treasury prices (and a rise in yields) that will be echoed on global bond markets,” he says. “Risk assets will fall notably as investors buy into higher bond yields, or shelter in cash or gold.”

Read: U.S. economists focus on NAFTA risk, not tax cut benefits

3. A slowing China. As the country transforms into an economy based on services and household consumption, its government might become less willing to prop up failing industries and bankroll leveraged investors, says Green. “At the same time, an increased focus on state control of the economy risks damaging entrepreneurial confidence,” he says. “A slowdown in China’s growth would trigger a slowdown in global demand and re-awaken fears of global deflation.”

Read: Chinese sectors to choose — and lose

Whatever happens in 2018, Green’s final advice is to keep investing.

“Economic history shows that, over time, markets go up,” he says. “For this reason, that time-honoured investment saying that it is all about ‘time in the market, not timing the market’ has led many investors to financial success.”

Also read:

The case for Japanese equities

Investors could be disappointed by equities in 2018: report

Originally published on Advisor.ca
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