2017 was another dramatic year in global finance. Equities surged, economies rebounded and the Trump administration squeezed out a landmark tax bill in the final week of the year. This is the backdrop that will influence the financial markets in 2018 and beyond.

For ETF investors, 2018 will be largely dictated by five major themes:

• Return of inflation
• Eurozone economic revival
• Continued dominance of supertrends
• Spotlight on emerging markets
• Lower risk-adjusted returns across multiple asset classes

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After years of quantitative easing and rock bottom interest rates, inflation is finally returning to advanced industrialized economies. The United States, Japan and Europe have all experienced a pickup in consumer price growth. However, with the exception of the United Kingdom, underlying inflation remains below central bank targets in these regions.

Inflationary pressures are likely to grow stronger in 2018, thanks to higher consumer demand and a synchronized global recovery. Against this backdrop, investors can expect central banks to gradually remove policy accommodation throughout the year, with the Federal Reserve and European Central Bank (ECB) leading the charge.

The Eurozone was one of the surprise economic stories of 2017, as GDP, employment and inflation all moved in the right direction. The currency region is on track for another year of steady growth, as the economic recovery spreads from the core to the periphery. This could also result in lower unemployment and stronger trade flows from countries such as Germany.

Positive eurozone expansion is making the region a more attractive bet for investors and currency speculators. These trends are expected to continue in 2018 as more investors look to capitalize on the long-awaited rebound.

Supertrends are dominant investment themes that offer stability and consistent growth over time. Backed by multiple, overlapping fundamental catalysts, supertrends usually become staples of a well-balanced portfolio. Investors in search of long-term growth trends needn’t look further than technology, defense and infrastructure. These sectors have not only withstood the test of time, they continue to benefit from strong fundamental catalysts.

In 2018, strong economic growth and favorable policies will continue to make these sectors an attractive option for value investors. As the Trump administration beefs up military and infrastructure spending, supertrends will continue to offer plenty of upside.

Emerging markets have long captivated the imagination of investors in search of higher yield. As China continues to transition from emerging market to industrialized nation, market participants are increasingly looking to India, Africa and Latin America for their next high-growth prospects. The bottoming out of the oil-price collapse is aiding key markets’ return to growth (such as Brazil and Russia). The synchronized global expansion we mentioned previously will shine the spotlight on emerging markets.

2017 witnessed a huge spike in the valuation of risk assets, as volatility hovered near historic lows and perceived risks failed to materialize. Although volatility and risks are expected to remain on the downside in 2018, the market will be prone to periodic sell-offs that could impact overall returns.

This environment will place more emphasis on fixed income assets, which can help shield investors from periodic spikes in market volatility. So, while the path was up and up for 2017, the next 12 months are expected to be much rockier.

Now that we’ve introduced the five major themes of 2018, you can take a look at our theme-specific content below, where we inform you of opportunities in these volatile markets.

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