Principal Global Investors chief global economist Bob Baur warns investors that 2018 will unlikely deliver the euphoric levels of financial market returns experienced in 2017.
Speaking at this morning's Financial Standard Chief Economists Forum, Baur said global economies were returning to normal, which in turn signals that interest rates are also returning to normal levels.
Inflation and low interest rates will be two key factors for the financial markets this year, although the former doesn't have the impact it once did, Baur said.
"If that's the case, that means good long-term financial market returns are going to be very hard to find," he said.
Baur forecasts 2018 returns will differ from the gains in 2017. The global economies however, will continue to perform as well as last year, he said.
The major economies, which make up 60 to 70% of the world's GDP, will pull the rest of the world along with them, he added.
"As time goes by, the world economies have just gotten better. There's hardly a single economy in the world today, except maybe Russia, which is in any kind of recession," Baur said.
The US will likely experience 3% to 3.5% growth boosted by the tax reform package passed in December.
Economic sentiment in Europe is high; business sentiment surveys indicate 3.5% global growth; and Germany for example is booming, he said.
Japan posted 2.5% growth rates in recent quarters, but has perhaps past its peak in momentum, Baur said, adding he expects 1% to 1.5% growth this year.
"This sounds low but it's pretty good for a country with a declining population. They've got an incredibly low unemployment rate at 2.8%," he said.
China will see a modest slow down after years of deceleration but grow about 6%, he said.
Overall, Baur forecasts global economies in 2018 will experience modest deceleration, while healthy growth rates will last until mid-2019.
If interest rates rise 4% to 5%, it would be unhealthy for the share markets, but he told investors: "Don't get depressed."
The good news for active fund managers in this current environment is they will get an opportunity to shine over the passive managers, Baur said.