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2018 market outlook from Invesco Powershares sees bull market set to continue

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Invesco Powershares has published its 2018 market outlook, writing that while geo-political concerns are a feature of the Trump era and many global assets appear stretched, the economic outlook for 2018 remains strong with the global equity bull market set to continue.

The Invesco PowerShares research team continues to prefer global equities and real estate, with cash and investment-grade global credit the preferred tools to dampen volatility.
Under a central scenario, real estate tops the list of projected returns for 2018 (in local currencies) at 10.4 per cent, followed by global equities at 7.6 per cent. Globally, corporate high yield, investment grade bonds and Government bonds are forecast to return 1.9 per cent, 1.3 per cent and 0.3 per cent respectively.

Paul Jackson, Head of Multi-Asset Research at Invesco PowerShares, says: “Under our favoured ‘central’ scenario we envisage a slight pick-up in global inflation during 2018 and a mild decline in global GDP growth (both to 3 per cent).

“We envisage a transition during 2018 to a situation where most major central banks are either tightening or removing support – the Bank of Japan being the exception. For example, we expect two Fed rate hikes during 2018 and expect the ECB to increase rates toward the end of 2018, having completed its tapering process during Q3.”

Invesco PowerShares suspects inflation will pick-up during 2018 and this, along with the removal of central bank stimulus, could dampen growth (global GDP growth and CPI inflation should be around 3 per cent).

The firm believes that the US economic cycle is well advanced but there is little evidence that recession is imminent. China remains in steady-state (6 per cent-7 per cent growth). The European economy is doing well but Brexit and Catalonia could be negative factors, the firm says.

2018 will see the transition from massive central bank easing to gradual tightening. The Fed has been tightening for some time and was recently joined by the BOE. Invesco Powershares also predicts the gradual rise in central bank rates expected during 2018, along with a degree of yield curve flattening, produces some (limited) upside in sovereign yield forecasts (US 10-year yield rising to 2.7 per cent, for example). Returns on global sovereign debt will be close to zero during 2018.

The firm writes that favoured assets for 2018 are Debt: emerging market sovereign; Equities: Eurozone; Real estate: Eurozone and Cash: USD, EUR.
 
Most favoured equity sectors for 2018 include US: industrials, food & beverage;   Europe: travel & leisure and financial services. Least favoured equity sectors for 2018 are US: chemicals, construction, technology; Europe: media, technology.

Paul Jackson, Head of Multi-Asset Research at Invesco PowerShares, says: “The onset of central bank tightening does not usually spell the end of the equity market cycle. Equity bear markets are more often associated with events such as war, economic recession, rising inflation/ bond yields – and such events are difficult to predict.

“A lot will happen during 2018. Markets are likely to be preoccupied by events such as the timing of the next US recession (we don’t think it will be during 2018), whether the Chinese authorities will deleverage enough to slow the economy (we doubt it), and the outcome of Brexit negotiations — will the UK leave the EU and under what circumstances? (probably, in poor circumstances). As such, the Economic Roller Coaster is a neat way to describe our views for 2018.”

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