2018

Global Market

Outlook

Step Forward,
Look Both Ways

A Note from Richard Lacaille, CIO

Richard F. Lacaille
Richard F. Lacaille

Richard F. Lacaille

Global Chief Investment Officer

BIO »

As we move into 2018, we believe macroeconomic conditions will support risk assets. Global growth is becoming more evenly distributed and is expected to return to its historical trend rate of 3.7%, while inflation remains muted.

There is, however, a tension between our positive outlook for 2018 and a number of near-term and longer-term uncertainties. As the US equity bull market enters its ninth year—the second longest on record—some investors are understandably concerned about the next pullback.

With this backdrop in mind, we think investors should look both ways—that is, that they should take a more cautious and risk-aware stance—as they step forward to make the most of the opportunities that synchronized global growth will likely offer in the year to come.

 

Growth Broadens, Returning to Trend

Christopher Probyn
Christopher  Probyn

Christopher Probyn

Chief Economist

BIO »

Simona Mocuta
Simona  Mocuta

Simona Mocuta

Senior Economist

BIO »

In 2018, we expect the global economy to reach its historic trend growth level of 3.7% for the first time since 2011. While this is still only an incremental improvement, we believe that, coupled with modest inflation, it provides an environment that can continue to lift markets higher.

The recovery of oil prices has provided a boost for the US and Canada, while fiscal stimulus supported Japan and domestic demand has buoyed the Eurozone.

Growth is also becoming more evenly distributed around the world, with some emerging market economies turning the corner. Brazil and Russia have emerged from deep recessions, India remains vibrant, and the long-awaited Chinese slowdown has failed to materialize.

Growth Projection Growth Projection

Projected characteristics are based upon estimates and reflect subjective judgments, assumptions, and analyses made by SSGA.

Will Markets Be More Skittish in 2018?

Elliot Hentov
Elliot  Hentov

Elliot Hentov

Head of Policy and Research

BIO »

The markets showed extraordinary complacency when confronted with geopolitical surprises in 2017. While 2018 holds fewer electoral milestones than last year, we still believe market participants need to stay acutely aware of geopolitical developments because so much of the global political order is now shifting.

As many of the trade and security assumptions of the last 70 years seem less certain, investors need to discern what a new global order might look like.  That will have direct implications for political risks, trade flows, commodity markets and ultimately global growth.

For the coming year, we expect the greatest source of uncertainty will stem from Washington, D.C., where everything from existential global trade and security risks to mid-term changes in party control could emanate.

Hotspot Infographic Hotspot Infographic

Our Portfolio Positioning

Lorne Johnson
Lorne  Johnson

Lorne Johnson

Senior Portfolio Manager

BIO »

As 2018 kicks off, our multi-asset portfolios are overweight in growth assets, with a preference for diversified exposure to global equities:

Equities

  • We have a balanced overweight to global equities, which continue to benefit from the synchronized recovery of earnings growth.
  • Our largest exposures are developed markets outside the US where valuations look most favorable and smaller overweight positions in US large cap and emerging market equities.

Fixed Income

  • We are underweight in intermediate US bonds and global government bonds outside the US.
  • We have a slight overweight to long-duration fixed income.
  • We have a slight underweight to high-yield credit.
US Model Portfolio Tactical Position vs Benchmark US Model Portfolio Tactical Position vs Benchmark

Capture More Upside in Equities

Gaurav Mallik
Gaurav  Mallik

Gaurav Mallik

Portfolio Strategist

BIO »

We think the equity bulls still have room to run. Valuations may be frothy in some sectors. But when we compare stocks to bonds, equity valuations remain below fair value at current interest-rate levels.

Even if US large-cap valuations have become stretched, we believe investors can still find opportunities further down the capital spectrum and in other developed markets outside the US, where earnings growth has been more robust and multiples have compressed.

Japan is particularly attractive thanks to relatively low interest rates, improving corporate governance, and a weaker currency, enabling Japanese companies to deliver strong earnings. If we see a normalization of relative risk between Europe and the US, along with Europe’s favorable valuations, we think local currency returns in the Eurozone may also have more room to run.

 

Don’t Bet Against Bonds

Matthew John Nest
Matthew John Nest

Matthew John Nest

Global Head of Macro Strategies

BIO »

Within bond markets we prefer relative value opportunities further down the capital structure, especially within higher quality, high yield issuers. We also believe emerging market local currency debt on a selective basis represents a further opportunity.

We think moderate growth and inflation will keep interest rates well anchored around a lower level, even as the Federal Reserve and other major central banks begin tapering their accommodative policies.

History may provide some insight into what we might expect: When the Fed was engaged in quantitative easing (QE) in the past, interest rates rose and credit spreads narrowed. As QE unwinds, it’s possible we’ll get the opposite of what we might expect—namely, lower rates and wider spreads.
 

Treasury Yield Reactions Chart Treasury Yield Reactions Chart

Prepare for Tail Risk

David Kobuszewski
David Kobuszewski

David Kobuszewski

Senior Portfolio Manager

BIO »

Ric Thomas
Ric  Thomas

Ric Thomas

Global Head of Strategy and Research

BIO »

As the US equity bull market enters its ninth year, investors are understandably concerned about the next pullback: when will it hit and how severe could it be?  Many investors continue to be worried about low probability, high impact events, or tail risks. We believe we are at that point in the cycle when investors should review the tail risk mitigation strategies in their portfolios.

There are many ways investors can consider hedging tail risk. But the two main questions are: “What kind of risk mitigation?” and “At what price?”

The following graphic summarizes the pros and cons of the main hedging approaches that investors might consider.

figure3 figure3

Better Days for Active Management?

Lori M. Heinel
Lori M. Heinel

Lori M. Heinel

Deputy Global Chief Investment Officer

BIO »

Historically low interest rates and policy-driven liquidity since the global financial crisis have sent equity market indexes ever higher and kept asset class correlations high and dispersion and volatility low. These conditions have created additional challenges for active managers to outperform.

But a move away from extraordinary monetary policy accommodation and lower cross-asset class correlations might be creating more conducive market conditions for active managers.

Regardless of the market backdrop, investors should consider active opportunities at the asset class, investment process and asset allocation levels.

 

Maximize the China Opportunity

George Bicher
George  Bicher

George Bicher

Asset Class CIO & Portfolio Manager

BIO »

Laura Ann Ostrander
Laura Ann Ostrander

Laura Ann Ostrander

Emerging Markets Macro Strategist

BIO »

Andrew Xiao
Andrew  Xiao

Andrew Xiao

Senior Portfolio Manager

BIO »

We believe 2018 will be a pivotal year for China with impacts across economies, markets and your investments. We think the market is underpricing this opportunity, providing an attractive entry point for investors in the coming year—provided the political situation remains stable.

While Chinese growth has moderated from extraordinarily high levels, it is unlikely to reduce sharply in 2018, thanks to long-term trends such as the shift away from investment-driven growth towards consumption and services.

Consumer spending among the 100 million-plus (and rising) middle class – higher now than in the US – is accelerating and we believe China’s significant contribution to global growth is likely to surprise to the upside in the next 12 months.

Consumption vs. investment as drivers of GDP Consumption vs. investment as drivers of GDP

About the Global Market Outlook

As investment challenges grow more complex, our Global Market Outlook is designed to alert investors to portfolio risks and opportunities in the coming year, based on the research of our investment teams.

Research around near-term and longer-term market issues is at the heart of who we are as investors. It drives the kinds of outcome-oriented portfolios we create for clients, drawing on the full range of our beta and alpha solutions as well as our asset allocation expertise.