Global markets appear vulnerable to fourth-quarter shocks
- U.S. recession risk edges higher, but remains modest
- Asia-Pacific markets on track to end 2016 with creditable performances
- Market pullbacks may provide investment opportunities
AUCKLAND, 4 October 2016 — Russell Investments today released its 2016 Global Market Outlook: Q4 Update, offering the latest economic insights and market forecasts from its global team of investment strategists, which help guide the firm’s multi-asset portfolios and services.
The team anticipates volatility in the final quarter of 2016, as markets absorb the U.S. election results, the Italian referendum and likely U.S. Federal Funds rate tightening. The strategists’ outlook for lacklustre global economic growth remains intact from the previous quarter. The team expects global bond yields to rise modestly as inflation pressures in the U.S. are offset by deflation in other developed markets. In currency markets, the U.S. dollar looks set to test previous highs, while the British pound remains at risk as investors focus on the full implications of the United Kingdom’s referendum earlier this year to leave the European Union.
"Asset markets are precariously priced and vulnerable to shocks, but market setbacks could provide opportunities to take on more risk in multi-asset portfolios," said Andrew Pease, Russell Investments’ global head of investment strategy. "The ability to dynamically allocate between asset classes is becoming increasingly important."
Asia-Pacific, New Zealand outlook: some wind in the sails?
The strategists see Asia-Pacific economies and markets as on track to achieve creditable performances for 2016.
"As we draw toward the close of 2016, the risks associated with regional debt, property market excesses and currency headwinds have not completely gone away, but they are in abeyance," said Graham Harman, senior investment strategist for Asia Pacific at Russell Investments. "China is successfully juggling the competing demands of economic rebalancing and a growth slowdown. Japan has delivered a GDP upgrade despite the headwind of a strong yen."
Regarding New Zealand and Australia, specifically, Mr Harman sees a similar theme of controlled inflation and solid growth. "The downdraft from the end of the commodity boom is now losing some of its bite; and, indeed, recent bounces in the milk price in New Zealand and the coal price in Australia are putting some wind in the sails of those two economies," he said. "Extremely low inflation is allowing official interest rates to remain accommodative, and the housing markets in both countries remain buoyant for now."
U.S. outlook: despite warning signs, only a moderate risk of recession
In the U.S., the team continues to expect an interest rate hike from the Federal Reserve in December, as well as two hikes in 2017 supported by modest economic growth and a gradual firming in inflation. The U.S. labour market remains healthy, and the strategists do not see signs of imbalances in business investment. However, the team does see warning signs stemming from the corporate sector, including a troubling rise in corporate leverage. Overall, the team maintains an underweight U.S. equities view, though their modeling shows only a modest risk of recession.
For more information on the global report, please see the 2016 Global Market Outlook: Q4 Update.
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