2018 Global Growth Headed for 6-Year High

State Street Global Advisors, the asset management arm of State Street Corporation, Friday released its Global Market Outlook for 2018–Step Forward, Look Both Ways–predicting that the coming year will be supportive of risk assets. However, the maturity of the growth cycle and a number of structural uncertainties will warrant a degree of caution.

SSGA forecasts more evenly distributed global growth, which it expects to return to its historical trend rate of 3.7% in 2018, for the first time since 2011, supporting company earnings and pushing equity markets even higher. The firm sees the best opportunities further down the cap spectrum within the US, and views developed markets such as Japan and Europe as particularly attractive, news outlets reported.

"The slow but steady improvement in global growth, coupled with modest inflation, provides the kind of macro environment that can continue to lift markets higher,” said Rick Lacaille, global chief investment officer for SSGA. "Valuations, although extended in some sectors, remain below fair value at current interest rate levels. Japan is arguably the most attractive developed market, given relatively low interest rates and a weak currency.”

The firm also expects that the ongoing move away from extraordinary monetary policy accommodation, alongside evidence of lower cross-asset class correlations, could be more conducive for active equity managers.

"Historically low interest rates and policy-driven liquidity following the global financial crisis have challenged active managers through higher correlations and lower volatility,” said Lori Heinel, deputy global CIO for SSGA. "That backdrop is changing. However, careful consideration of where, when and how to go active is essential in order to strike the right balance alongside smart beta and core index exposures.”

SSGA also sees more opportunity in bond markets. While further rate rises from the US Federal Reserve and European Central Bank are in store despite low inflation, the firm expects rates to stay anchored at a relatively low level, Business Insider reported.

"While we are unlikely to see the bond bull to keep charging in 2018, we do think the bears will probably be proven wrong for another year, even as the Fed is expected to raise rates and other major central banks begin tapering their accommodative policy. That said, investors need to balance duration and credit risks carefully. While emerging market debt valuations have become less attractive, a tilt towards quality can continue to deliver results,” added Lacaille.

SSGA tempers its outlook with a degree of caution recognizing that, eight years into the growth cycle, some investors are increasingly wary of the potential for a pullback.

Opportunity Areas

The report indicated improvements in both developed and emerging economies such as Brazil, Russia, India and China had supported the “historic trend growth level”.

Geopolitical risks would hang over investors in the coming year, but State Street would maintain a “general risk-on positioning” and expected to see further earnings potential in equities.

Developing markets were earmarked as an area of opportunity for potential returns, with Japan and China singled out in particular.

“Japan is particularly attractive thanks to relatively low interest rates, improving corporate governance and a weaker currency, enabling Japanese companies to deliver strong earnings.”

2018, or the 'year of the dog' according to the lunar calendar, would be a “pivotal one for China”, the report stated.

“We think the fear-mongering over China’s debt has been overstated and 2018 could offer an attractive entry point for long-term investors, provided political stability is maintained,” it said.

Despite China’s level of debt, which had reached 257% by year’s end in 2016, it seemed the ruling party would begin “deleveraging by reducing industrial overcapacity and housing stock”.

“The rate of overall credit expansion has already begun to slow and the gap between credit expansion and nominal GDP growth has narrowed,” the report said. “We believe China’s significant contribution to global growth is likely to surprise to the upside in the next 12 months.”

China’s growth would experience a “modest deceleration” in 2018 of 6.4% from 6.8%, the report added.

On more domestic terms, the predicted growth of the Australian economy for 2018 was 2.4%, with a predicted inflation rate of 2.3%, the report showed.

“For 2018, we expect rate hikes in the US, the UK, Canada and Australia,” the SSGA report said.