- Global equities could still push higher before facing headwinds later in the year
SYDNEY, 29 March 2018 — Russell Investments released its 2018 Global Market Outlook – Q2 Update today, offering economic insights and market forecasts from its global team of multi-asset investment strategists.
After a volatile start to the year, investors face complicated market conditions. Synchronized global growth and strong corporate profits are battling monetary tightening and inflation pressures for control of global markets. The tailwinds are prevailing for now, but the strategists believe headwinds could overcome markets later in the year as interest rates rise, inflation picks up and profit margins come under pressure from rising labor costs. Protectionist trade policy has also emerged as a risk, but the team views a full-blown trade war as unlikely.
"We continue to see Europe, Japan and emerging markets outperforming the U.S. in what could be a relatively flat year for global equities," said Andrew Pease, global head of investment strategy at Russell Investments. "We are still looking to add risk into market pull-backs, but we recognize that 'buying the dips' may become more challenging as markets grow more sensitive to recession risks later in the year."
The team sees the U.S. as experiencing a highly unusual tug of war between fiscal and monetary policy with Congress passing tax cuts and a large increase in discretionary government spending, while the Fed will have to limit this stimulus to prevent the economy from overheating. In anticipation of rising inflation and faster rate hikes, 10-year U.S. Treasury yields have risen and are now in-line with the strategists’ fair value estimate. However, U.S. equities, in the team’s view, remain very expensive.
Considering other regions, the strategists expect the Eurozone's mid-cycle renaissance to continue through 2018, despite the strong euro; while they see Asia-Pacific as remaining 'good, but not great' as global growth underpins demand and monetary policy remains relatively accommodative.
Looking specifically at Australia and New Zealand, Sydney-based Senior Investment Strategist Graham Harman sees the current negative spread between both countries and the U.S. as the main recent development. "That's something we haven't seen in some time, and it likely will remain through the year," he said. "Given our view that the Fed will raise rates at least three times this year, while the Reserve Bank of Australia will hike twice at most and the Reserve Bank of New Zealand will leave rates unchanged, this should place some downward pressure on both currencies over the medium term."
For more of the team's latest views, please see the 2018 Global Market Outlook – Q2 Update.
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AUSF1-00739. First Used: March 2018