Global Economic Update (2017/Nov)

To date, investors have been generously rewarded for taking the view that all would turn out well

Morningstar Analysts 27 November, 2017 | 14:51
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Outlook for Investment Markets

The outlook for the world economy continues to strengthen, particularly in the formerly moribund eurozone, and it provides greater support for growth-oriented assets. But valuations remain expensive across all asset classes, and are vulnerable to an eventual normalisation of interest rates, which is already under way in the United States and the United Kingdom, although it is still some time away in the eurozone and Japan. Investors also appear overly complacent about potential risks that could kick away the props for today’s expensive valuations.

International Fixed Interest — Outlook

Interest rates look set to rise further from their still historically very low levels: Remarkably, according to the latest estimates by Bloomberg Barclays, there are still some USD 11 trillion worth of debt securities trading at negative yields.

The key market is the U.S. To date, moves towards higher yields have been erratic. Inflation has generally remained lower than the Fed would like, but the latest data, for October, showed that ‘core’ (ex food ex energy) inflation was running at 1.8%, and getting closer to the 2.0% the Fed would like to see. The outlook has also been affected by politics: uncertainty over the appointment of the next Fed chair (since resolved, with a responsible choice of a successor to Janet Yellen), and ongoing uncertainty over the passage of a U.S. tax cut and tax-reform package, with bond yields tending to rise when tax cuts have looked more likely.

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