• Quantitative models show U.S. recession risk flashing 'caution', not 'warning'
• Amid market risks, the team believes global equities still have room to run in 2018

SYDNEY, 3 July 2018 — Russell Investments released its 2018 Global Market Outlook – Q3 Update today, offering economic insights and market forecasts from the firm’s global team of multi-asset investment strategists.

The team believes the two key global market trends of early 2018—U.S. growth leadership and the U.S. dollar bounce—have run their course. Looking ahead, the strategists are watching for any escalation in the trade war issue and keeping an eye on the yield curve for a U.S. recession warning. However, the team believes the latter seems unlikely before late 2019.

"Our cycle, value and sentiment decision-making process at mid-year holds us at a broadly neutral weighting on global equities," said Andrew Pease, global head of investment strategy at Russell Investments. "We have a small preference for Europe, Japan and emerging markets over the U.S., and expect that the U.S. 10-year Treasury yield has limited upside. We see the U.S. dollar bounce as having run its course."

Assessing the U.S. economy, the team at mid-year expects it can continue with above-trend growth through mid-2019. However, the team believes U.S. Federal Reserve (Fed) policies appear on track to invert the yield curve by the end of this year. Given the usual lags, they believe this means an elevated risk of recession by the end of 2019 and through 2020.

The team also remains positive on the Asia-Pacific outlook. Fears of a significant China slowdown in the strategists' view are overdone, and they believe the rest of developing Asia has shown good resilience to the rising U.S. dollar. Japan is more mixed, with weak consumer data offsetting strong corporate indicators. However, they expect rising real wages should see the household sector recover.

Senior Investment Strategist Graham Harman, who expects China's economy to continue on a good footing, said, "Private investment in China is growing, and it is likely we will see an increase in Chinese government spending to further boost activity and confidence."

Similarly, Mr Harman sees economic growth in Australia as solid, underpinned by public investment, external trade and buoyant business confidence. "Looking at corporate performance, we see the potential for positive earnings revisions, particularly in mining and resource companies," he said. "We view the weaker-than-expected labour market as temporary and expect to see a rebound in the second half of 2018."

In New Zealand, though, weak business confidence and a slowing housing market remain headwinds. "Political uncertainty in New Zealand has dissipated following the release of a fairly sensible budget from the new Labour-party government; however, uncertainty lingers in several key policy areas," Mr Harman said.

Regarding Europe, the firm's strategists note economic growth has cooled, but believe it is still above trend and that corporate earnings are growing at a healthy pace. They rate the threats to global trade and Brexit as bigger dangers for Europe than other threats, such as Italian politics.

Looking at currencies globally, the team sees the bounce in the U.S. dollar since mid-April as mostly technical and not the start of a structural dollar bull market. They also see signs that the dollar rally is running out of steam.

Considering their quantitative modeling tools, the U.S. business cycle index model estimated at mid-year points to relatively low recession risk over the next 12 months, while their model for U.S. equities versus fixed income has bounced back (relative to the end of Q1 2018) to a small pro-equities bias at mid-year 2018.

To view the report, please see the 2018 Global Market Outlook – Q3 Update.

About Russell Investments

With more than 80 years of experience, Russell Investments is a global investment manager, dedicated to helping investors reach their long-term goals. Russell Investments offers investment solutions in 31 countries, manages A$389.4 billion in assets (as of March 31, 2018). Russell Investments specialises in multi-asset solutions, scouring the globe to deliver the best investment strategies, managers and asset classes to its clients around the world.

Headquartered in Seattle, Washington, Russell Investments operates globally with 21 offices, providing investment services in the world’s major financial centers such as New York, London, Tokyo and Shanghai. For more information about how Russell Investments helps improve people’s financial security, visit www.russellinvestments.com/au.

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Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 (RIM). This document provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation or needs. This information has been compiled from sources considered to be reliable, but is not guaranteed. This document is not intended to be a complete statement or summary. Copyright © 2018 Russell Investments. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments.

AUSF1-00752 First Used: July 2018