2018 Outlook: “Despite robust global economic growth, we anticipate greater uncertainty in 2018 as central bank policy begins to tighten. We see better opportunities outside the United States, with emerging-market technology and consumer names particularly interesting areas.”
— Stephen H. Dover, CFA
We expect 2018 to be a potentially pivotal year for global equity markets. The global economy should continue to hum along, with both developed and emerging markets maintaining their momentum. However, we expect the era of cheap money will slowly draw to a close, bringing with it new uncertainties. Global equity markets broadly appear to be pricing in significant earnings growth, but some regions such as Europe and Asian emerging markets were more attractively valued than their U.S. counterparts as of late 2017, making it increasingly important for investors to focus on individual company fundamentals.
A 'Goldilock' Macroeconomic Scenario
The synchronized expansion we have seen around the world over the course of 2017 looks set to continue unimpeded in 2018. After being narrowly driven by a few countries like the United States and China, we have seen the expansion broaden out, with greater participation from Europe, Japan and various emerging markets, suggesting to us that the cycle has further to run. Still ample liquidity, potentially more supportive fiscal policy in a number of major economies and easing lending conditions should all help underpin global growth over the course of the coming year. Inflationary pressures have remained subdued, but we think they should pick up as the recovery advances.
With this more durable economic recovery has come a simultaneous move by certain central banks to begin to tighten monetary policy. We see two reasons for this. First, economic conditions have improved in a number of regions to the point that tighter policy is warranted. Second, we believe central banks need to begin to give themselves greater leeway to act in the future to provide stimulus should economic growth weaken over the medium term.
With the recovery in the United States the most entrenched, the U.S. Federal Reserve (Fed) is already farthest down the path toward policy normalization. We anticipate a gradual rise in interest rates over the year, along with a continued unwinding of the Fed’s massive balance sheet as the economic recovery continues and the labor market remains relatively tight. In Europe, policy is likely to tighten more gradually as the recovery builds steam and inflationary pressures remain subdued.