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Economic risks are related to the reforms underway within their country, rather than what happens externally,  such as in Brazil or Argentina (pictured).
Economic risks are related to the reforms underway within their country, rather than what happens externally,  such as in Brazil or Argentina (pictured).

An Overview of Global Outlook for Next Year

FTI expects the reversal of quantitative easing, rate hikes and rising inflation pressures in the United States to be among the most impactful factors for global financial markets

An Overview of Global Outlook for Next Year

As markets shift away from the recovery era of monetary accommodation amid synchronized global growth, some investors may be wondering where potential opportunities can be found.
This is a summary outlook for the year ahead from Franklin Templeton’s global macro, fixed income, equity and multi-asset investment teams. They highlight why they think US interest rates look poised to keep heading higher, why global equities may have more room to run and why investors may need to be more selective in the fixed income space, Franklin Templeton Investments reported.
A number of factors are poised to pressure US Treasury yields higher, in FTI’s view: the reversal of quantitative easing as the US Federal Reserve unwinds its balance sheet, the exceptional strength in US labor markets, rising wage and inflation pressures, ongoing resiliency in the US economy, and a structural shift toward deregulation by both the Trump administration and potentially a Jerome Powell-led Fed.
Investors who are not prepared for the shift from the recovery era of monetary accommodation to the expansionary post-QE era may be exposed to significant risks. “We think it is critical not only to defend against current US Treasury risks but to structure portfolios to potentially benefit as rates rise.”

  Specific Emerging Markets
The impact of Fed policy tightening on emerging markets should vary from country to country in the upcoming year.
It’s important to identify countries with idiosyncratic value that may be less correlated to broad-based beta (market) risks. Countries that are more domestically driven and less reliant on global trade often have those idiosyncratic qualities along with inherent resiliencies to global shocks.
A select few have already demonstrated that resilience in recent years, notably Indonesia. For others, FTI believes economic risks are related to the reforms underway within their country, rather than what happens externally, such as in Brazil or Argentina.
In the major developed economies, FTI continues to see unattractive bond markets, particularly the low to negative yields in the eurozone and Japan.

  Inflation to Rise
FTI expect the reversal of QE, rate hikes and rising inflation pressures in the United States to be among the most impactful factors for global financial markets.
“Overall, we are reasonably optimistic that a positive economic backdrop could remain intact over the coming year. At the same time, we cannot ignore the view of many market participants that fixed income markets appeared fully valued on a number of traditional metrics as of late 2017.”
While persistently high core inflation could spur rates to climb faster than anticipated, FTI thinks the more likely scenario is a modest uptick in inflation, particularly over the coming year. “We believe inflation has been persistently low as a consequence of several factors, primarily globalization and technology.”

  Monetary Policy
FTI regards 2018 as a critical juncture for global financial markets and economies, given that central bank monetary policy is set to provide incrementally less support for a wide range of risk assets.
“We see greater potential for a return to normal levels of volatility, as markets adjust to an environment in which business fundamentals look set to continue powering up, monetary policy will begin powering down, and fiscal policy and economic growth could be increasingly influential as they are taken off standby mode.”

  Risks Involved
All investments involve risks, including possible loss of principal. Stocks historically have outperformed other asset classes over the long term, but tend to fluctuate more dramatically over the short term.
Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.
Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets.
Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value.

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