Running with the bulls
Each year we share our 2018 Global Market Outlook with hundreds of global institutions and businesses who trust us to invest over $350 billion of their assets. This report offers in-depth expert analysis of the economic and market indicators that we expect will drive global investment performance for the year ahead. It will also inform the thousands of investment decisions we’ll be making on your behalf in 2018.
By Russell Investments
Can global investment markets sustain a similar rate of double digit returns in 2018 as last year? Our strategists think the growth momentum we witnessed in 2017 is likely to persist into at least the first half of 2018.
Last year delivered better returns than most industry analysts expected, but the current market cycle is old and the U.S. Federal Reserve ('The Fed') is about to step up the pace of interest rate hikes. In fact, our 2018 annual outlook is very U.S.-centric. That’s because the U.S. still dominates global markets and is further advanced in its market cycle than other economies, which means that most scenarios are likely to be driven by the U.S.
Running with the bulls can be dangerous
It’s easy to get swept up in the elation of the crowd and underestimate the risks. With market sentiment indicators pointing to a near-term risk of a pullback, could 2018 be a year of two halves?
Our central view is that equity markets can push higher over the first part of the year, before facing more challenging conditions later in 2018 as markets factor-in rising risks of a 2019 recession.
"Equity markets may push higher over the first part of the year before facing headwinds later in 2018, as markets factor in rising risks of a 2019 recession."Andrew Pease - Global Head of Investment Strategy
Treading a path between euphoria and danger
Uncertain conditions mean it makes sense for our strategists to look at three scenarios for 2018, rather than preparing for only one outcome:
Fed mistake triggers a 2018 recession
What could happen…
- The Fed raises interest rates too far, into a sluggish economy.
- R-star (the real rate consistent with full employment/neutral real rate) turns out to be much lower than expected.
- Markets hit turbulence in early 2018.
Voted most likely
What could happen…
- Equity markets face increasing challenges later in the year. Japan, Europe and emerging markets (EM) outperform the U.S. in what could be a relatively flat year for global equities.
- Growth and earnings are stronger in Europe, Japan and emerging markets.
- The U.S. 10-year Treasury yield approaches its fair value of 2.7% before declining as recession odds grow. The yield curve flattens and potentially inverts by year-end.
What could happen…
- The Fed tightens rates by less than expected, growth is ok and inflation doesn’t rise much.
- The US Dollar is weak, emerging markets do very well.
- Euphoria takes hold and investors borrow money to join the market rally.
Our strategists believe the central scenario is most likely.
There’s an old saying that bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria. The phase we have yet to encounter with the current bull market is euphoria. This is when we would see the upside scenario of the blow-out rally.
Asia Pacific spotlight: Low rates, solid growth
2017 was a strong year for the Asia-Pacific region, underpinned by solid global growth and Chinese demand. We expect the region’s economy to post another year of high growth in 2018, with good support from Australia and Japan, with developing economies outpacing their developed neighbours.
We continue to be bullish on the Australian economy. Strong business confidence has been translating into solid payroll gains, and we are starting to see the signs of improving capex plans.
The economy may start the year with solid growth and a low inflation pulse. However, we expect to see signs of re-emergent wage and price inflation over 2018, which will see the Reserve Bank of Australia hike rates twice.
The Australian equity market has lagged global markets in 2017. We see potential for the market to catch up through 2018, driven by improving commodity prices.
We expect 2018 will be another strong year for the region. Developing countries will continue to set the pace, but we will be looking for further incremental improvements in Japan and Australia. Central bankers will remain highly supportive.
The region as a whole continues to look a tad expensive, in part driven by the Chinese technology sector which is extremely expensive. Within the region, we think Japan remains fairly valued, but is moving towards expensive territory following the impressive run this year, while Australian equities remain slightly expensive.
Strong momentum in regional equities is starting to suggest that some markets have become overbought. This has become particularly apparent in Japan. Despite this, we note that a late-stage cyclical upswing in the global economy would be a driver for momentum in the region.
The Asia-Pacific region is set to continue its impressive performance through 2018, underpinned by robust growth in China and the global economy. Valuations are looking a bit expensive, but within the region there remain pockets of fair value. Late-cycle dynamics in the global economy will further boost regional growth.
So how are we planning to manage your super savings in this environment?
With this backdrop, we will aim to:
- diversify our sources of investment return,
- continue to use a dynamic asset allocation process, and
- seek effective implementation capabilities, managing downside risk when the markets become increasingly expensive and overly optimistic.
The dynamic process used by our global team of investment strategists has helped us navigate markets in recent years, and will continue to help us navigate what could be an unpredictable year. We will watch closely for evidence that markets have moved too far into fear or euphoria and look for downside management when it is cheap.
Investing in 2018 offers few certainties and plenty of potential risks
Our cycle, value, sentiment (CVS) investment decision-making process helps us deal with the uncertainty ahead. We step back from the current market psychology and have the discipline of breaking each decision into three building blocks: is this asset class cheap or expensive, is the cycle a tailwind or headwind, is sentiment overbought or oversold?
Without a solid process, there is the very real risk of being drawn into euphoria at the market peak and capitulating with despondency at the cycle bottom. Investors can’t afford these mistakes—particularly given the grim outlook for longer-term returns told by high equity market valuations and low government bond yields.
Should I change the way my super is invested?
It’s a good idea to review your investment strategy if your personal circumstances have changed, or it’s been a while since your last review. This can help to determine if your investment strategy is best suited to your investment goals, and your appetite for risk.
Think long term
Our range of diversified portfolios is designed to deliver against investment return objectives over the medium to long term. This includes allowing for periods of low or even negative returns.
Every day our local portfolio management team actively manages the composition of these portfolios to maximise the likelihood of delivering on their objectives, to give you the best chance at a great life after work.
Switching between investment options in an effort to chase higher short-term returns or protect yourself from falls in the markets could mean you lose out over time. Investment markets are continually changing—by the time you react to one set of market conditions, the market may have already moved on. You run the risk of locking in losses and missing any resulting recovery.
Your superannuation is a long-term investment that is best served by taking a long-term view.
We’re here to help
Want to review your investment strategy? Never made an investment choice and want us to explain your options?
If you have any questions about your super, including your investment strategy, give us a call on 1800 555 667 or request a call at a time that suits you.
We can also connect you with our phone-based advice service for a recommendation on the optimal investment strategy for you—at no extra cost.