The tide is high: non-conventional central bank policy has sent waves of liquidity flooding into global asset markets, which together with a synchronised pick-up in global economic growth provides a favourable backdrop for risk assets, according to our 2018 Investment Outlook.
As policymakers intended, investors have shifted out of ‘riskless’ assets into riskier sectors. And now?
As the sweet spot of stronger growth and low inflation – the ‘Goldilocks’ scenario – looks set to continue in 2018, central banks will gradually retreat, led by the US Federal Reserve. But this should be offset by continued liquidity support from the ECB and Bank of Japan. Overall, this effectively removes interest-rate risk. This should lower the risk of a ‘tantrum’ in sovereign bond markets.
In this environment, the good times can roll on. This is particularly so since many investors are not overwhelmed by the feel-good factor.
We believe the valuations of risk assets generally continue to underpinned by solid expectations for economic growth and a prolongation of a market climate in which the secular and global deflationary forces arising from technology and demographics look likely to persist. Low inflation, in other words, should allow central banks to raise interest rates modestly, if at all.
We believe abundant liquidity will continue to fuel the search for yield.
In our view, valuations in equity markets are not extremely high. We believe it is reasonable to expect gains in earnings in 2018 and hence equity appreciation.
We do not see (gentle) rising interest rates triggering a bond market sell-off in 2018.
We see scope for emerging market (EM) assets to deliver strong returns. EM equities have lagged returns in developed markets since 2010, so there is potential for further outperformance.
