An improving world economy should be positive for financial markets, helping to boost global trade and growth along with corporate earnings. However, major central banks may take away the punch bowl to prevent investors partying too hard.

Nearly a decade since the global financial crisis, the latest data points to a world economy that is finally emerging from its prolonged slump.

The International Monetary Fund's (IMF) "World Economic Outlook" report released last month said the global upswing was picking up speed. Global growth is seen rising to 3.6 per cent this year and 3.7 per cent in 2018 after last year's sluggish 3.2 per cent expansion, which was the slowest pace since the GFC.

The IMF said stronger growth in the Eurozone, Japan, Russia, emerging Asia, and Europe more than offset slightly weaker projections for the United States and the United Kingdom. A "benign global financial environment" and a recovery in advanced economies, along with continued strong growth in China and other parts of emerging Asia, support the improved outlook.

Importantly for Australia, key export markets are seen improving too. China, the world's second-largest economy, is expected to post 6.8 per cent gross domestic product (GDP) growth in 2017 and 6.5 per cent next year, while Japan, the third-biggest, should deliver 1.5 per cent GDP growth this year and 1.1 per cent in 2018.

The United States, the world's largest economy, should expand by 2.2 per cent this year, rising to 2.3 per cent in 2018, even while the US Federal Reserve puts the brakes on with higher interest rates.

Similarly, the World Bank has reported that growth in the Eurozone and Japan "exceeded expectations" in the first half of 2017, with US growth also rebounding strongly.

"World trade appears on track to expand at its fastest pace since 2010. Interest rates remain low as the US Federal Reserve and the European Central Bank (ECB) move gradually to retreat from loose monetary policy," the bank said in its October report on developing East Asia and the Pacific.

In a 26 October report, the Washington-based bank said commodity prices should rise further in 2018 too. Oil is expected to average US$56 a barrel, up from US$53 this year, helping prices for energy commodities such as coal, natural gas, and oil rise by 4 per cent next year after a large 28 per cent gain in 2017.

Metals prices have surged by 22 per cent in 2017 but are expected to "stabilise" in 2018 as an expected correction in iron ore prices is offset by gains in base metals such as nickel and zinc.

The upturn should boost Australia's exports, which have already helped deliver 11 straight monthly trade surpluses on the back of strong earnings growth from exports of iron ore and gold.

An improved global trading environment should not only aid Australia's resource sector. Others to benefit, especially from improved US growth, could include gaming company Aristocrat Leisure (ASX: ALL), registry provider Computershare (ASX: CPU) and shopping centre owner Westfield Corp (ASX: WFD).

Stock slump?

However, the news is not all positive for investors. Citi strategist Matt King has warned that efforts by the Fed, the ECB, and other central banks to unwind ultra-easy monetary policy could ultimately cause a 25 per cent fall in global equities prices and push up spreads on investment-grade bonds by 1 percentage point.

"I think it is remarkable how, on the one hand, central banks were so enthusiastic about distorting markets, and yet how they underestimate the magnitude of the distortionary effect of their policies--how sensitive markets are to their policies," King told the Australian Financial Review in an 18 October report.

The Fed has already raised rates twice this year and the odds of a December hike have been put at 98 per cent, based on federal fund futures. On Thursday, the Bank of England increased interest rates for the first time since 2007, while the European Central Bank is expected to start "normalising" policy by reducing its bond buying.

Morningstar's head of equities research, Peter Warnes, has warned that quantitative tightening could take eight years, but would also "normalise" shareholder returns.

"The powerful tailwinds of lower and lower interest rates have driven risk asset prices sharply higher and pushed investors further out the risk curve in search of both capital gains and yield," he said.

As these tailwinds start abating, "it is unlikely total shareholder returns, as measured by the S&P/ASX 200 Accumulation Index, will get near the 9 per cent average annual compound rate achieved during [quantitative easing], as monetary policy is tightened and central bank balance sheets are normalised.:

Instead, Warnes argues that investors should expect more normal returns of around 5 to 6 per cent a year, "the level to which … investors should now recalibrate their expectations".

Nevertheless, stronger global growth should present opportunities in fast-rising emerging markets, which are highly leveraged to world trade. For Australian investors, the plethora of exchange-traded funds and other instruments have made such markets more accessible than ever before.

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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does not have an interest in the securities disclosed in this report.

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