A Chinese investor monitors stock prices at a brokerage house in Beijing, Wednesday, Nov. 22.Mark Schiefelbein/The Associated Press
Synchronized global growth, strong earnings, muted inflation and central bankers looking to take their foot off the gas: that's been the story of 2017, and next year could be a straight sequel.
As the year heads into its closing stretch, strategists are beginning to report on their outlook for 2018. Here is a summary of some of those views.
UBS: "Is there room to grow and normalize?"
Backdrop:
* The pivotal question for 2018 becomes whether the macro environment provides room for markets to grow. Although 2017's momentum may be hard to repeat, projections show space for the economy to expand. A combination of solid growth, low but gently rising core inflation, and relatively easy financial conditions allow space for policy makers to normalize policy further in 2018. Low inflation also gives them the option to reverse course if risks emerge.
Asset Allocation:
* Bullish on European and Japanese equities, favoring capex-exposed sectors in Europe and cyclical stocks in Japan. A 7-per-cent to 9-per-cent return from U.S. stocks is a reasonable expectation for 2018.
* Expects dollar weakness against the euro, strength against the Canadian dollar and Japanese yen.
* Targeting a 2.7-per-cent 10-year Treasury yield at the end of 2018, and a bund yield of 0.9 per cent.
* For emerging markets, expects 8-per-cent to 10-per-cent returns in equities and 5 per cent in dollar terms in local-currency bonds. Sees hard-currency sovereign debt spreads widening and currencies steady against the dollar.
* In credit, prefers U.S. high-yield over investment-grade but sees spreads and default rates moving modestly higher. The search for yield should keep a strong bid for euro credit.
Barclays: "More of the same"
Backdrop:
* The world economy will grow at 4 per cent in 2018, with upside potential if the U.S. enacts significant tax reform. There is no sign that global inflation pressures pose a risk, either to the expansion or to markets. Investor concerns about coordinated tightening might pick up in the second half if the global output gap closes further and wage pressures finally surface, but central banks are unlikely to pose a risk to markets in the first half.
Asset Allocation:
* Elevated valuations in most risk assets suggest less robust but positive future returns, not an imminent correction.
* Still likes equities over fixed income, expects bond markets to stay range-bound, and the dollar to resume its medium-term weakening trend after there is clarity on tax legislation.
* Fundamentals are very positive for emerging-market assets, but with term premiums depressed, recommends equities, real exchange rates and credit in the emerging-market space, rather than local-currency bonds.
UniCredit: "Solid growth and attractive markets in 2018"
Backdrop:
* Strong global growth will continue in 2018, with the U.S. enjoying a short-term boost from tax cuts, the euro region retaining solid momentum and emerging markets generally in good shape. Major central banks are likely to withdraw stimulus very gradually. Growth prospects look less favorable in 2019.
Asset Allocation:
* Overall environment likely to remain supportive for several risky asset classes, particularly euro-region equities and emerging markets.
* History suggests that when the cycle is mature, and the economy is running above potential -- as is the case in both the U.S. and the euro area -- equities and commodities outperform. There is no particular reason why this should be different this time, especially since monetary policies will remain accommodative.
* Fixed-income will probably struggle to deliver positive returns in 2018, but the hunt for yield is not over and emerging-market bonds are best positioned to benefit.
* In credit, current stretched levels and a pickup in supply do not leave any room for further spread compression and 2018 may well end with slightly wider spreads. Commodities might surprise thanks to rising demand for industrial metals.
Hermes Investment Management: "Unusual year for markets"
Backdrop:
* The coming year will be dominated by how the markets respond to the gradual reversal of unconventional monetary policy stimulus. However, the road to policy normalization will be long and slow, offering another two years of negative real rates in the U.S., U.K., Japan, and euro area. This give credence to the "new normal" view of low-for-longer rates and yields, rather than an imminent return to pre-crisis levels. In which case, the most one might expect in 2018 is not for policy to become tight again, just less loose.
Asset Allocation:
* Base multi-asset case is for the market to remain supportive for growth assets.
* In equities, expects a broadening market, with more opportunity for stock-pickers. Remains positive on Europe, technology stocks; however, U.S. retail and real estate shares look challenged.
* Environment for emerging markets is "healthy" at present; positive though more moderate earnings growth in store in 2018.
* In credit, fundamentals are positive; attractive value at the long end of the curve.
Robeco: "Playing in extra time"
Backdrop:
*We are now in a late-stage cycle, the quality of the global credit market has steadily weakened, China's private sector debt is approaching an inflection point and unemployment rates are in steady decline around the world. Growth momentum is picking up, earnings momentum is strengthening and, notably, a rise in inflation is nowhere in sight. Central banks are not acting like party poopers just yet. Sure, debt is too high and credit is too loose, but as long as sentiment stays high, financial markets can easily ignore such concerns.
Asset Allocation:
* Quite likely that bond bulls will be challenged if the global cyclical upswing continues in 2018.
* The German bond market has not shown such a disconnect with fundamental pricing factors for over 50 years, foreboding negative returns in the medium term.
* However, it is not unthinkable an upswing will sustain credit spreads and cause them to grind even lower well into the year.
* Sustained profitability in an environment of rising rates would then still favor high yields compared to investment grade bonds. But the impact of an "accident" in the junk bond market could very well be rising.
* For equities, it seems likely the current positive momentum will push stocks even higher.