With the start of a new year, fund management firms have been issuing their market outlooks for equities and bonds.
Starting with equities, JP Morgan Asset Management said valuations were not considered overly stretched but that investors should be prepared to be nimble in 2018, with lingering questions about the direction of inflation and how central banks may change course on stimulus.
At Germany’s Union Investment, Benjardin Gärtner, head of equities, expects 2018 to be a year for European stocks as the regional economy booms and prices remain low while profits are rising.
“Corporate profits are expected to increase by between six and eight per cent. This creates headroom for rising prices. Because the economy is flourishing worldwide, and not just in Europe, the prospects for cyclical stocks look particularly good.”
Emerging market economic growth is forecast to remain strong. Schroders expects global growth to be sustained at 3.3% in 2018 which will support global trade and be positive for emerging markets. These markets are forecast to grow at an aggregate 4.9% in 2018.
While China’s economy is projected to expand robustly in 2018 the pace of growth is expected to decelerate to 6.4% from the 6.8% last year given a tightening of monetary conditions. This is likely to act as a modest drag on global trade.
Schroders expects strong growth in the Central European emerging markets of Poland, Hungary and the Czech Republic to persist and an expected broadening in the eurozone economic recovery should continue to be beneficial.
Maarten-Jan Bakkum, senior emerging markets strategist at NN Investment Partners, said he expects 2018 to be the third year in a row in which emerging equity markets outperform developed markets.
“Growth prospects are adequate and risks seem manageable,” he said. “The main theme is an accelerating credit growth almost everywhere in the emerging world, so that both consumption and investments are on the rise after years of contraction. Risks are always there, but they now seem to be mainly country-specific and therefore not insurmountable for the emerging world as a whole.”
In fixed income, with interest rates starting a slow climb back upwards, yields will rise slightly in 2018.
Further rate rises are expected by the Federal Reserve this year. US yields are climbing at the short end but as long-term rates remain low, the US curve is starting to flatten.
Fraser Hedgley, head of client portfolio managers, Nomura Asset Management, said: “One thread runs through our views of the fixed income markets for 2018: do not expect sustained drama.
“Our central view is that a 2% Fed Funds rate is quite likely in 2018. We expect that already ironed-flat yield curves will see limited yield rises at the long end and that the global and US economies will continue their expansion.”
But Ian Spreadbury, portfolio manager, Fidelity Strategic Bond Fund, said bond yields were likely to be low.
“Debt and demographics will continue to act as headwinds to growth and inflation. This means that bond yields are likely to stay low,” he said.
Government bond yields should remain in their current ranges, he added. But he also said that corporate bonds “have performed very well in 2017 and that may continue in to 2018”. Yet here he also said that there are areas of this asset class that looked stretched in terms of valuations, particularly the high yield market.
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