Financial Markets 2018: Growth Underpins Equities
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Financial Markets 2018: Growth Underpins Equities

With growth robust, interest rates should slowly rise. Equities should make further gains in 2018.

As strong economic growth boosts earnings, subdues volatility and raises confidence, global equity markets can rise further.

Global growth leads earnings growth

Global growth leads earnings growth

Source: Datastream, International Monetary Fund, Credit Suisse
Last data point: October 2017

Emerging market equities and domestically oriented Eurozone assets like real estate equities are most favored. Credits face more fundamental restraint as corporates re-leverage balance sheets, so spreads should ultimately widen. Bond yields should rise, but mainly outside the USA, which should mean another soft year for the US dollar.

Watch the video on financial markets featuring Joe Prendergast, Head of Financial Markets Strategy:

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Mind the Risks

Despite our optimistic outlook for the world in 2018, there are a number of risks investors should keep in mind. Among the chief risks we identify are potentially counterproductive policies, specially protectionist measures, geopolitical risks such as an escalation of the tensions between the USA and North Korea or business cycle risks such as an unexpected slowdown in China or the USA. For investors to best protect portfolios, diversification remains key.

Portfolio Checks 2018

Defining how a portfolio of assets should be composed is the critical first step toward achieving investment success. After all, more than 80 percent of a portfolio's return and risk are determined by this investment policy, or Strategic Asset Allocation (SAA), and only 20 percent by tactical positions and security selection.

Investor Takeaways

  • With growth robust and bond yields seen as rising gradually, equities are expected to outperform bonds in 2018. Healthcare, telecoms, industrials and financials are our most favored equity sectors.
  • Corporate re-leveraging is likely to lead to some credit spread widening. BBB is our most favored segment within credit.
  • Good earnings growth and an above average valuation discount compared to developed world equities should continue to support emerging market equities and selected local currency bond markets.
  • With relatively high yields but also cyclical sensitivity, real estate equities are favored in the Eurozone.
  • A tighter Fed policy and fiscal expansion may nudge US yields higher, but Eurozone yields are likely to rise more, which should underpin the euro in 2018.
  • Commodities are expected to rise. Industrial metals are likely to reflect strong growth, but gold is vulnerable to rising yields. Oil prices are likely to remain range-bound.