- Expensive equities remain a key concern
- Conditions for government bonds favour rising yields
- Asia-Pacific: Developing economies lead amid positive momentum in the region
SYDNEY, 3 October 2017 – Russell Investments has posted its Q4 2017 global market outlook report, “Momentum verses Asymmetry," offering economic insights and market forecasts from its global team of multi-asset investment strategists.
The firm’s strategists describe a combination of economic growth, low inflation and easy monetary policy in developed economies that is currently supporting a range of asset classes, including equities, corporate credit, real assets and government bonds. This market environment is asymmetrical, however, as the downside potential outweighs the upside, especially in U.S. equities, where the cyclically-adjusted price-to-earnings ratio of the S&P 500® Index hovers at its most expensive level ever except for 1929 and the late 1990s. The strategists remain underweight U.S. equities, preferring Europe, Japan and emerging markets within global equities. They also see government bonds as expensive across regions and expect global yields to trend upward over the next year.
“Global growth, inflation and monetary policy have created an economic sweet spot as we look ahead to the fourth quarter of 2017, but we believe high valuations make U.S. equities vulnerable to any news that upsets the industry consensus on moderate growth, low inflation and low interest rates,” said Andrew Pease, global head of investment strategy at Russell Investments. “With the potential for volatility to return, we believe a globally diversified multi-asset investment strategy may offer the best opportunity for both portfolio returns and downside protection.”
Asia-Pacific outlook: developed markets firming
Looking at the Asia-Pacific investment landscape, the team has become more positive on the region.
“Developed markets are firming, though we maintain our view that the developing economies in the region will outperform for 2017,” said Alexander Cousley, investment strategy analyst. “However, since the Asia-Pacific equity market has stayed on the wave of positive momentum in 2017, valuations remain slightly expensive as we move into the fourth quarter.”
Mr Cousley added that Australian economic activity has been solid, despite a cautious consumer.
“Australian businesses have been reporting elevated levels of confidence for much of the year, and this has been translating into robust hiring levels and increasing capex plans,” he said, adding however that the strength in the Australian dollar (up 9% against the U.S. dollar and 2.5% on a trade-weighted basis), if sustained, will likely prove a slight drag on trade.
U.S. market outlook: benefiting from international markets
The strategists caution that U.S. fixed income markets appear to be underestimating the potential for upward pressure on interest rates in 2018 and that U.S. economic fundamentals still look mediocre. A fundamental factor they see as likely helping U.S. earnings is “secondhand growth” from other economies, which supports tilting equity allocations toward non-U.S. markets that have been the engine of growth and trading at more attractive valuations.
The team believes the biggest risks to U.S. markets – a recession scare or an inflation scare – do not seem likely in the near-term. In addition, while fixed income markets appear to have currently priced in only two more U.S. Federal funds rate hikes through the end of 2018, the team thinks a faster pace is warranted by fundamentals.
For more information on the annual report, please see the 2017 Global Market Outlook – Q4 Update.
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First Used: October 2017.