01Can the global economic expansion continue?
Yes. We expect the global expansion to continue, carrying global equity markets to new highs in 2018.
- We think the economic and market cycle is well supported and has yet to fully mature.
- Investors will likely need to navigate more risks, including moderating growth, central bank tightening and geopolitical developments.
- We believe emerging market (EM) economies will outperform developed economies, supporting EM assets.
Investment Implications
With the global economic expansion likely to continue, we prefer equities over credit and credit over rates. EM, outside of China, is a bright spot and we continue to prefer EM over developed market assets.
We prefer equity over credit, and credit over rates as we think the expansion has yet to fully mature. We prefer EM relative to DM.
2017 View 2018 View
Less Attractive More Attractive
Equity
US Equity
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European Equity
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Japanese Equity
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Emerging Market Equity
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Moderate but positive returns in equities. Equities remain our preferred asset class. After the run-up this year and given the potholes that need to be navigated, we expect only moderate, but positive returns supported by the continuing expansion and earnings strength. Within DM, we prefer Europe and Japan, where relative valuations are supportive and leverage to the global cycle and the rebound in global investment spending is greater than in the US. Globally, we prefer EM equities relative to DM.
Fixed Income
Emerging Market Debt Local
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Investment Grade Corporate Bonds
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High Yield Corporate Bonds
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US Government Fixed Income
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Bearish on government bonds. We believe the market is underpricing the pace of future Fed rate hikes and think the softness in US inflation data this year is temporary. More broadly, the risk of more US fiscal expansion, discussions about the potential for the Fed to adopt a higher inflation target in the future and the risks around the slowdown in global QE flows all suggest the need for a higher risk premium in government bonds.
Turning point in credit approaching. We think current levels of spreads are roughly justified by the macro environment and corporate fundamentals. From here, we expect bouts of volatility and favor a dynamic approach to manage that. We think it is too early to position for the turn in spreads for the cycle, but we are approaching that point and are more likely than not to reach it in 2018.
Real Assets
Commodities
Less Attractive More Attractive
Public Real Estate
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Public Infrastructure
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Oil prices bounded by OPEC cuts and shale supply. We think the willingness of OPEC to cut supply will provide a floor for oil prices at around $40/barrel and the ample supply of shale will provide a ceiling at around $60/barrel. We also expect the broader commodity market to generally be range-bound. This makes commodities a key area for a more dynamic approach to allocation.
Currency
US Dollar
Less Attractive More Attractive
Euro
Less Attractive More Attractive
Japanese Yen
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Chinese Renminbi
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US dollar, EM currency to outperform. After underperforming in 2017, we expect the US dollar to outperform as interest rate differentials should increasingly favor the US. Should it occur, we would sell into such strength, since the power of rate differentials is likely to eventually fade as other central banks get closer to the exit. EM currencies should continue to benefit from the global growth backdrop and low inflation, though the path is likely to be more volatile.
Source: GSAM. As of November 2017