2018 should be another year of above-trend economic growth

• We expected 2018 to be another year of above-trend economic growth and continue to favour equities versus bonds.
• We expect a cautious withdrawal of the ultra-accommodative policy and a monetary policy horizon beyond 2018, unless inflation overshoots.
• The Japanese economy is exiting multi-decade-long deflation. After his re-election, Shinzo Abe is in a good position to push for further reforms in Japan.
• Our central scenario remains in favour of risky assets.

Visibility on the policy mix is globally increasing, as political risk is receding. Some major hurdles have been cleared in recent weeks.

• In the US, the expected tax reform should be delivered at the turn of the year. Further, the Fed Chair nomination should pave the way for a smooth transition from the Yellen to a Powell Fed. The US central bank started its balance-sheet reduction in October and Candriam expects it to hike again twice next year.
• In the Eurozone, we think that we are past the peak of policy uncertainty. In addition, the ECB has recalibrated its programme and will continue to purchase assets for at least three quarters in 2018, at a 30bn pace, and has left the door open to some extension, while there should be no rate hike before 2019.
• In Asia, the snap elections in Japan have validated Shinzo Abe’s mandate and increased visibility on the policy mix for the coming years. The Bank of Japan should remain the most accommodative central bank. The next central bank governor will be a dove and support prime minister Abe’s economic programme.
•  In China, the Politburo will seek to prevent major risks and effectively control banks’ leverage ratio in 2018 while implementing further supply-side structural reforms.

The global expansion dynamic is well underway. The most recent data confirm that the outlook for the world economy appears solidly anchored above 3% growth for next year. In particular, the Eurozone and Japan are expanding above potential in spite of the currency strengthening earlier this year. All US economic momentum indicators have recently accelerated, supported by hard data (housing and real estate, households and the industrial sector), lengthening the horizon of the ongoing expansion. Earlier this year, emerging markets benefited from tailwinds like increasing commodity prices, a weaker USD and accommodative central banks. Inflationary pressures remain subdued, but are expected to increase gradually through 2018.

Risks to the scenario. The main risk to our expectations would be an abrupt end to the Goldilocks environment. A persistently rising oil price, leading to an acceleration in inflation, could be one trigger. A sharp slowdown in growth would be another – either due to a monetary policy error or a significant slowdown in the Chinese economy.

GENERAL OVERVIEW: Equities vs. Bonds

For the last month of this year, Candriam’s global conviction continues to favour equities against bonds.

• The global economic momentum is further accelerating.
• The ECB is recalibrating its programme, while the Fed should stick to its current path and the Bank of Japan remain accommodative. In this context, the global balance sheet of all central banks will continue to grow until Q4 2018.
• Valuations have increased, but still aren’t showing bubble levels.
• As global growth continues to firm, geopolitical risks (North Korea, Middle East) remain the main obstacles.

REGIONAL EQUITY STRATEGY

Positive on equities

We have a neutral stance on US equities. On the policy mix, we see progress on fiscal stimulus along with a tightening Fed. The transition from the Yellen Fed to a Powell Fed should be smooth. Valuations are high, so earnings growth is critical to higher equity-market forecasts.

We are positive on EMU equities. Recent data confirm the ongoing, more robust and geographically broadening economic expansion in the region. An accommodative central bank with a monetary policy horizon beyond 2018 and decent corporate earnings momentum underpin the attractiveness of the region’s risk assets, no longer subject to a major political risk premium. Economic strength is trumping political worries in Germany. The Euro appreciation could impact European corporate profits, but improved domestic demand should offset this negative impact.

We are negative on Europe ex-EMU equities. Moving on to the next phase of the Brexit negotiations leaves less than one year to set up new trade relations. The hawkish Bank of England monetary policy stance is acting as a barrier to GBP depreciation and challenging overseas profit growth. The Autumn Statement confirmed a dull outlook.

We have a positive stance on Japanese equities. Shinzo Abe’s mandate was validated this autumn, increasing visibility on an accommodative policy mix. Central bank divergence (accommodative central bank vs. tightening in US, EU) should support Yen weakness and profit growth, as well as exposure to the global cycle.

We have a neutral exposure to emerging market equities. Emerging-market equities performed well, thanks to improving fundamentals and USD weakness, until early September. We locked in some profits, realising that the fundamental backdrop remains supportive.

FIXED INCOME STRATEGY

With a tightening Fed and expected upcoming inflation pressures, we expect rates 

and bond yields to gradually increase. In addition to rising producer prices, we expect rising wages and potential stimulus to push inflation higher, although this might take longer than expected to materialise.

The improvement in the European economy could also raise EMU yields.

On emerging-market debt, the ongoing monetary easing is highly supportive of this asset class.We have a neutral view on credit, as spreads have already tightened significantly and a potential interest-rate increase could hurt performance.