6th December 2016
Global economic growth is likely to improve, spurred by fiscal stimulus as political leaders worldwide move away from austerity says Russell Investments.
Longer-term, however, they think the prospect of trade protectionism raised by Brexit and the U.S. presidential election could mean slower growth and higher inflation.
Wouter Sturkenboom, senior investment strategist EMEA, at Russell Investments, says: “Buckle up for what could be a roller-coaster investing ride in 2017. We will watch closely for evidence that markets have moved too far into fear or euphoria and look for downside protection when it is cheap.”
UK: growth outlook below market expectation, with all eyes on the path of Brexit
According Russell Investments, where the UK ends up on the Hard or Soft Brexit spectrum is critical because of the amount of economic and financial disruption that could increase if the UK moved towards a Hard Brexit. The firm believes that while risk of a UK recession has declined, it expects growth to slow significantly and is predicting a growth rate slightly below consensus between 0.8% and 1.2%
Sturkenboom says: “All in all, the forces pulling the UK back from a Hard Brexit are every bit as formidable as those pushing towards it. Unfortunately, for now we simply have to wait and see how these competing forces play out. While equity valuations remain slightly cheap, we are maintaining a small underweight position in UK equities. For fixed income investors, they should take note of the balance between near term oversold sentiment signals and medium term slightly expensive valuations.”
US: equity valuations expensive, and anticipation of Trump stimulus could lead to an extended overbought period
In the U.S., Russell Investments highlight Trumponomics is untested and they believe too much stimulus could overheat the U.S. economy, resulting in more Fed tightening and an economic downturn in 2018. They see equity market valuations as already expensive, and they caution that euphoric anticipation of Trump stimulus could lead to an extended overbought period.
Sturkenboom says: “Trumponomics is directionally pro-growth, pro-inflation, and our central scenario is a net addition of half a percentage point to real GDP growth. We believe corporate profit growth is likely to be in the mid-single digits at best, while currently high margins may feel pressure from rising labour costs and a stronger dollar. Against this backdrop, we favour Europe and Japan equities over the U.S. in global portfolios, and expect expensive U.S. valuations to limit future market performance.”
Europe: equities are slightly cheap in absolute terms; closed underweight position in core European bonds
On the outlook for European financial markets, Russell Investments is positive on the region’s outlook due to favourable fundamentals. It believes Eurozone equities are slightly cheap in an absolute sense and outright cheap relative to the U.S. Meanwhile, its investment division has closed its underweight position in core European bonds following yields rising slightly above the team’s year-end target of 0.2%. In 2017, they are predicting core bonds to remain range-bound at 0% to 0.5% and peripheral bonds at 1% to 2%.
Sturkenboom says: “Waiting for outperformance in Eurozone financial markets has felt like waiting for Godot. Over the past year, every time it looked like an upward trend had been established, something caused it to falter. However, fundamentals have remained favourable in 2016 and this combined with attractive valuations continue to point to an overweight position to Eurozone equities. Looking ahead, the political risks need to be monitored, but we are optimistic there will not be any surprises in the Eurozone next year along the lines of the Brexit vote outcome or U.S. President-elect Trump’s victory.”
Outlook for Asia and currencies: