- Equity markets look deeply overbought with the U.S. most vulnerable
- Asia-Pacific economies motoring on, despite global headwinds
SYDNEY, 30 March 2017 – Russell Investments today released its 2017 Global Market Outlook – Q2 Update, offering economic insights and market forecasts from its global team of multi-asset investment strategists.
Russell Investments’ strategists warn that investor expectations have run ahead of market fundamentals in the global equity markets. They maintain a call for caution as inflated expectations for global growth and U.S. fiscal policy drive markets higher, despite looming global economic headwinds, including additional Federal Reserve (Fed) tightening and a slowing Chinese economy. On the positive side, opportunities remain for agile multi-asset investors, as the strategists see little risk of a recession in the U.S., attractive growth in Europe and resilience in emerging markets. The strongest tailwinds for global equities in the team’s view are in Europe, followed by Japan.
“While market bulls see reflation and investor confidence, we see very expensive U.S. equities, high profit margins and an economy unlikely to sustain the current surge,” said Andrew Pease, global head of investment strategy at Russell Investments. “A pull-back seems likely and should create a buying opportunity, which means we are maintaining our ‘buy the dips, sell the rallies’ investment strategy.”
U.S. growth expectations remain mediocre, leading the team to maintain its forecast for a total of two interest rate hikes in 2017, despite the Fed’s more confident stance to start 2017. Although a more hawkish Fed creates headwinds for U.S. Treasuries, the team believes the market is already pricing-in three hikes for the year. Per the strategists, this means most of the damage to U.S. Treasuries is in the rear-view mirror and they are less negative on bonds than in prior quarters.
“Knowing when market exuberance will meet reality is more art than science, but our investment strategy building blocks of business cycle, valuation and sentiment clearly indicate downside risks for U.S. equities,” said Paul Eitelman, multi-asset investment strategist for North America at Russell Investments. “Expensive valuations and overbought sentiment signals drive our caution. Globally diversified, multi-asset portfolios may look to the positive cyclical outlook in European equities and the value in emerging markets. In addition, 10-year U.S. Treasury yields are close to our estimate of fair value at 2.5%.”
For the Asia-Pacific region, the firm’s strategists see Asia-Pacific equity markets are fairly priced, with interest rates facing upward pressures as global reflation returns.
“Economies in the Asia-Pacific region are motoring on, with our expectation for full-year 2017 real GDP growth at just under 5%. That’s just a slight acceleration on 2016, as trade continues to improve and as business conditions firm,” said Graham Harman, senior investment strategist for Russell Investments in Sydney.
In Australia and New Zealand, specifically, he added that interest rate and inflation cycles are bottoming out, but expects any moves toward tighter monetary conditions are still some way off. “With commodity prices stabilising and housing still holding up, we look for reasonable performance from those economies through the remainder of the year,” Mr Harman said.
Regarding China, Mr Harman said he sees a continuation of better growth numbers in 2017, and many indicators of China’s economic activity are looking increasingly healthy. In some contrast, he added that Japan’s economy remains one of the weaker parts of the region, despite slightly firmer GDP data this year and some improvement in exports. “Demographic headwinds, a strong yen, as well as stubbornly low inflation and wage growth, leave the overall outlook for Japan somewhat downbeat,” he said.
With all things considered globally, the strategists believe the search for yield is not going to get any easier as 2017 progresses against a backdrop of record U.S. equity prices, narrow credit spreads and low bond yields. The team suggests investors will need to venture further afield in search of returns, using the full range of tools available in a globally diversified, multi-asset portfolio.
For more information on the annual report, which also includes the strategists’ latest views on Europe, Asia-Pacific and currencies, please see the 2017 Global Market Outlook – Q2 Update.
About Russell Investments
Russell Investments, a global asset manager, offers multi-asset portfolios and services which include advice, investments and implementation. Russell Investments stands with institutional investors, financial advisors and individuals working with their advisors—using the firm’s core capabilities that extend across capital market insights, manager research, asset allocation, portfolio implementation and factor exposures—to help each achieve their desired investment outcomes. The firm has more than USD$258 billion in assets under management, with USD$123.7 billion in multi-asset solutions (as of 12/31/2016).
Headquartered in Seattle, Washington, Russell Investments operates globally with 21 offices, providing investment services in the world’s major financial centers such as London, Paris, Amsterdam, Sydney, Tokyo, Shanghai, Toronto and New York. For more information about how Russell Investments helps to improve financial security for people, visit russellinvestments.com/nz.
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Forecasting is inherently uncertain and may be incorrect. It is not representative of a projection of the stock market, or of any specific investment.
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First Used: March 2017.