21 December 2017

Ireland, Dublin

Tighter monetary policy could create headwinds for stock markets next year

Mercer, a global consulting leader in advancing health, wealth and career, has identified four key investment themes it expects to heavily influence returns on pension scheme assets in 2018. Mercer has advised Irish pension scheme trustees to consider these themes carefully in setting their investment policies.

The four investment themes are:

1.    The shift from quantitative easing (QE) to tighter monetary policy and the likely headwinds this will create for stock and bond markets

2.    Decreased returns and higher risks posed by the late stage in the credit cycle which we are entering

3.    Increased political uncertainty and the challenge of developing investment policies to manage shock events

4.    An increasing focus on environmental, social and governance (ESG) issues and related obligations for pension scheme trustees

“The global economy is growing at the fastest pace since the financial crisis of 2008. We expect growth to continue into 2018, though it is likely to be reined in by tighter monetary policies from global central banks,” said Paul Kenny, Partner, Mercer.

“Our view is that the primary risk to markets is the question of whether central banks can tighten monetary policy at an appropriate pace without impacting economic growth or sparking a market correction.”

Mr. Kenny added: “Trustees also need to pay attention to the potential impact of political risks on markets over the medium term, and the importance of assessing environmental, social and governance factors when investing for the long term.” 

These themes are explained in more detail below.

Theme 1 – QE to QT

In response to low levels of unemployment and robust growth, many of the world’s major central banks are starting to pull back on the expansionary monetary policies that have supported economic growth and fuelled increases in asset prices over recent years. These policy shifts are moving investors from an economy supported by QE to one that will need to be robust enough to withstand quantitative tightening (QT). The pace and scale of the shift from easing to tightening will be a major influence on economies and markets through 2018 and beyond, and will likely create headwinds for stock and bond markets.

Theme 2 - Preparing for the later stages of the credit cycle

The later stages of a credit cycle typically present a challenging environment for pension schemes, offering lower returns and greater risks than the early or mid-cycle periods. While we anticipate the current economic strength will continue into 2018, trustees should start considering how they might evolve investment strategies for the risks and opportunities that the late stage of this cycle could present.

Theme 3 - Political fragmentation

Since the financial crisis of 2008, politics has become increasingly polarised, manifesting in the Brexit vote, elections across Europe, the election of Donald Trump and, more recently, in the Catalan bid for independence. Trustees are likely to face an environment of heightened political uncertainty for some time and should consider stress-testing investment policies for shock events when reviewing their strategies in 2018.

Theme 4 - Stewardship over how assets are invested and managed

The financial crisis of 2008 also chipped away at trust levels. As such, trustees increasingly need to recognize the importance of their role in acting as stewards of the pension scheme assets entrusted to them. All trustees should aim to put in place a set of beliefs in relation to ESG issues. A growing percentage of investors globally are seeking to reflect their values and to promote sustainability and social good when investing their assets; we encourage Irish pension scheme trustees to do likewise.

Commenting on these investment themes, Mr. Kenny said: “There is no certainty as to how markets will evolve over 2018 and beyond. Ultimately, trustees need to ensure they have robust investment policies that will respond well to a variety of economic scenarios. 2018 is a crucial year for Irish trustees to consider these themes and make appropriate changes to their investment policies”.


About Mercer

Mercer delivers advice and technology-driven solutions that help organizations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 22,000 employees are based in 43 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With more than 60,000 colleagues and annual revenue over $13 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit Follow Mercer on Twitter @Mercer and @MercerIreland


For further information and details of Mercers 2018 Global Investment and Economic Outlook and the 2018 Themes and Opportunities, please see the links below to access these whitepapers:

The 2018 Outlook white paper can be found here.

The 2018 Themes and Opportunities paper can be found here.