Executive summaryWe retained a “glass half full” mantra for asset prices over the past year, buttressed by a growing global economy and ample liquidity thanks to pro-growth central bank policies. Corporate profit growth was solid and inflationary pressures were muted throughout 2017. Investors were largely rewarded throughout the year, with strong returns for global equities and real estate, and modest but still positive results for bonds.
We see 2018 as a continuation of global economic momentum, but we expect less of a response in asset prices than 2017 provided. Global equity markets are at all-time highs and interest rates are near all-time lows as investors anticipate ongoing positive growth undertones. The new year could offer some challenges. Central banks could follow the U.S. Federal Reserve’s (Fed’s) lead and start to unwind easy money policies should inflation increase. In addition, the United States faces midterm elections in 2018 and corporate profits will hit more difficult comparisons following a robust 2017. The potential for weakening fundamentals in China, European growth tapering and geopolitical tensions could also contribute to a more strained investment environment.
While we remain optimistic, we see portfolio returns as positive but more muted in 2018. We see the chances for a recession in the coming year as low based on how broad-based consumer and business activity is, along with widely available credit. Longer term, lower economic productivity, less credit growth and an aging population are issues for financial markets to digest. However, in the near term, we expect investors to continue a pro-growth investment orientation. We favor domestic and international developed equities over bonds and commodities.