Investment outlook2017 delivered better-than-expected global equity returns, but the cycle is old and the Fed is set to step up the pace of rate hikes.The current bullish momentum will face strengthening headwinds as 2018 progresses.
Asia Pacific Outlook2017 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, though with developing economies outpacing developed.
U.S. OutlookGlobal growth has lifted the U.S. economy and multinational earnings to their strongest position in years. But with an eight-year-old U.S.expansion, imbalances gradually building, and expensive market valuations, we believe some caution is warranted for U.S. equities. We forecast lackluster U.S. equity market returns in 2018 and view
end-of-cycle risks as becoming elevated thereafter.
Eurozone OutlookThe eurozone is in the middle of a mid-cycle renaissance, both economically and politically. Reflation combined with the refutation of populist movements in the region have laid the foundation for a self-sustaining recovery that could last for years to come. This environment should provide a strong tailwind to eurozone financial markets, which we continue to favour.
Despite offering higher interest rates than most of their developed-market counterparts, the U.S. dollar (USD) and the New Zealand dollar (NZD) were the two worst performers among Group of Ten (G10) currencies in 2017. We would not bet on a reversal of that trend. The story is different with emerging markets (EM) currencies, which are still appealing despite a tentative recovery this year.
Quantitative ModellingOur model for U.S. equities versus U.S. fixed income continued to stay in the positive range in the past few months. We still see low inflation and decent GDP growth which are good conditions for equities. While we have seen them increase in value, we’d be cautious of expensive valuations and a flattening yield curve.