Walking a tightrope in 2018

We expect another strong year for growth with the global economy firing on almost all cylinders. But the market has priced in this optimism, implying greater vulnerability for disappointment. We expect the low interest rate environment to continue into 2018. While interest rates can drift up, we do not think this is the beginning of the end for the bond markets.

The conditions driving the recent impressive equity market gains could stay in place for much of 2018. However, I also see potential sources of downside risk in 2018 given the tightening of QE measures across the globe, combined
with structural headwinds for growth such as debt and demographics. We start the year with a tactically cautious view on equities. Timing any corrections is difficult but also crucial for our clients’ investment outcomes as market returns may stay strong until just before a correction.

Investors looking to adopt a prudent strategy can do so in three ways. The most active way is to stay long equities but keep the finger on the trigger to reduce risk when we see more late cycle signals. A more systemic way is to gradually lower the equity exposure as we go deeper into 2018. Finally, investors could add appropriate hedges to their portfolios. In our portfolios that are long market risk, we prefer to be long inflation and long the US dollar and Japanese yen.