2018 investment outlook: Mid-year updateContributors Karen Ward, Global Markets Insights Strategy Team
- Our investment outlook for 2018 was titled, “It ain’t over till the central banks sing”. We argued that although the cycle was relatively old, there were still not convincing signs that the global economy was at full capacity. Until inflation reared its ugly head, the central banks were likely to keep global monetary conditions loose, which would continue to support risk assets.
- With unemployment now sub-4% in the US, the Federal Reserve (Fed) has started humming. But the European Central Bank (ECB) and Bank of Japan (BoJ) are yet to break out a tune. Such loose monetary policy outside of the US continues to weigh on global monetary conditions and the US 10-year government bond yield has not managed to sustain a break much above 3%.
- What we perhaps hadn’t bargained for was an increasing amount of background noise from governments-the US administration in particular. The threat of a global “trade war” is dampening corporate spirits in the major export hubs of Europe and Asia.
- There are no such signs of weakness in the US and growth and interest rate differentials have contributed to a sizeable upward squeeze on the dollar which in turn has created challenges for some emerging market (EM) economies.
- Over the second half of the year we expect some reacceleration in growth outside of the US as the underlying drivers of the synchronised recovery– employment growth and increased availability of cheap credit–reassert themselves.
- The combination of robust earnings and subdued prices leaves equity valuations less stretched than they appeared earlier in the year. We expect modest gains in equity prices by year end as government bond prices drift lower.
SYNCHRONISED RECOVERY STILL IN PLACE
The synchronised recovery, which proved so fertile for assets markets last year, is still ongoing, with growth in the major economies-the US, the eurozone, Japan and China-still above trend.
This is translating into robust corporate earnings. First-quarter earnings beat expectations across the board. US bourses were the star performer as the sizeable tax cut helped earnings per share jump 25% in the first quarter. But earnings were also comfortably above expectations in Europe and Japan. European companies reported earnings growth of 10% and the Labour shortages suggest firms will need to raise productivity
In Q1, earnings beat expectations in all major markets