Mark Lister: Potholes in the investment road ahead

China, the second largest economy, remains an enigma for many. Photo / Getty Images

• Mark Lister is Head of Private Wealth Research at Craigs Investment Partners (and a Mainfreight shareholder). This column is general in nature and should not be regarded as specific investment advice.

Yet again, this year has been a very profitable one for investors in almost all asset classes, with shares, real estate and bonds all doing well.

Looking ahead to next year, there is a plethora of things that could go wrong. While it's impossible to predict what might derail this increasingly mature bull market, here are five potholes worth thinking about in 2018.

1. An inflation surprise. Inflation has been missing in action for so long now that many people have given up on it returning anytime soon. Maybe that's fair, but inflation tides can change very quickly.

If labour market tightness in the US starts pushing up wages, or if rising factory prices in China become a global phenomenon, the benign "modest growth, no inflation" backdrop we've been enjoying could begin to fade. "Low growth, higher inflation" is far less friendly for investors.

2. The return of political risk. For the last couple of years, we've been worrying needlessly about political risk. Brexit came and went, as did Trump, as did the French election. None managed to dent the positive sentiment for long, and normal service quickly resumed.

Have we become a little complacent? Maybe, and there are a few events in 2018 that could shake things up a little. Italy is likely to go to the polls in April, while the US holds mid-term elections in November.

3. A housing market correction. If there's one thing that would really make things messy for us here in New Zealand it's a big correction in the property market, either here or in Australia (given they're our biggest trading partner).

We've got a lot of eggs in the housing basket, not to mention a scary level of debt sitting behind it. A major correction in house prices would do much more damage to our economy than a sharemarket or dairy price collapse.

4. A disorderly reaction to central banks changing tack. Markets have been accustomed to the world's central banks providing a steady diet of interest rate cuts, quantitative easing, and reassuring comments about how they'll do "whatever it takes".

However, the Federal Reserve in the US has started moving back towards normal, and the European economy is getting too strong for the European Central Bank not to inevitably follow.It could be very disruptive if it happens more quickly or aggressively than people think.

5. A sharper than expected slowdown in China. The world's second largest economy remains an enigma for many analysts. Credit growth has been extraordinary, debt levels look far too high and you can still only take the economic statistics with a grain of salt.

Then again, are you brave enough to bet against them? The economy is controlled centrally, as is the currency and just about everything else. The authorities can orchestrate whatever outcome they desire, to a degree.

China has an ambitious reform agenda planned, and while these should make for a more stable platform in the years ahead, they could come at the expense of growth in the short-term.