Credit Suisse

Capital expenditure: Companies across sectors are seen as increasingly deploying their ample cash, joining already strong trends in manufacturing, transport and utilities. As a result, capital expenditure (capex) is forecast to become an important driver of overall economic growth in 2018.

Quantitative exit: 2017 saw the US Federal Reserve make further steps towards exiting its still accommodative monetary policy. A number of other developed market central banks are set to join the normalisation bandwagon in 2018. Though Credit Suisse expects policymakers to proceed with caution and thus support the favourable trend in financial markets, the removal of stimulus could create pockets of volatility in currencies as well as equity and credit markets.

Eye on China: The Chinese economy has benefited from the global recovery thanks to higher exports and the devaluation of the renminbi. However, high corporate debt levels have been a growing concern. Efforts to restrain credit and a policy bias towards stability are encouraging, but not without risks for asset prices. Nevertheless, a steady adjustment process, as well as currency stability, is expected.

Next generation’s footprint: The so-called Millennials are coming of age and beginning to make their influence felt in all realms of life, be it as investors, consumers or trendsetters. The trends they shape will open up new opportunities for investors, while their preferences as consumers are expected to keep pressure on the traditional sectors.

UBS Wealth Management

The global context: Key changes, key risks 

Central banks will tighten monetary policy and in some cases raise interest rates in 2018. In certain areas, especially financial services, this will bring opportunities, except in the unlikely event of significant hikes. But amid rising rates, investors will also need to prepare for higher volatility, higher dispersion of returns from individual stocks, and in some cases higher correlations between equities and bonds. Conversely, this may benefit alternative and other active asset managers.

Extreme political scenarios, principally a US-North Korea conflict, remain a low-probability risk for markets. However, politics may have a significant local impact. Investors can either hedge this by diversifying their portfolios globally or by treating it as an opportunity, particularly in the case of longer-term trends such as emerging market infrastructure development.

Likewise, extreme financial outcomes, principally a Chinese debt crisis, are unlikely to materialize in 2018 but worth monitoring. Total bank assets in China are 310 per cent of GDP, nearly three times higher than the emerging market average. However, China's high growth rate, powerful state, and closed capital account make it less susceptible to debt crises. Our base case is for 6.4 per cent growth versus 6.8 per cent in 2017.

Finally, social, environmental, and technological change continue to present both opportunities and risks. For the stock market, we see the most important long-term tech themes as digital data, automation and robotics, and smart mobility. Investors can also put capital to work in a variety of social and environmental fields across the growing field of sustainable investing, including multilateral development bank bonds and impact investing as well as listed equities.

Americas and emerging markets

The US economy should expand by 2.2 per cent next year, the same rate as in 2017. The country should benefit from strong labor markets and corporate profitability. We expect the Fed and the Bank of Canada to hike rates twice. In Latin America, we see growth increasing from 0.5 per cent to 3.1 per cent in Brazil and from two per cent to 2.2 per cent in Mexico. This should help support emerging market debt, which offers average valuations relative to fixed income in other regions.

Europe & Switzerland In Europe, growth could moderate in 2018, falling from 2.3 per cent in the Eurozone and 2.2 per cent in the EU this year to 1.9 per cent next year. However, we see pockets of acceleration – for instance in Switzerland, where growth should accelerate from 0.8 per cent to 1.8 per cent. We remain positive on Eurozone relative to UK equities. Leading economic indicators are at multi-year highs in the Eurozone, and its companies are highly geared to an improving global economic outlook.

Asia-Pacific The outlook for the Asia-Pacific region remains varied but upbeat in 2018. Japanese growth is likely to remain flat at 1.8 per cent. China will continue to experience a managed slowdown, with property construction slowing in response to falling prices. By contrast, India's growth should overtake China's, rising from 6.6 per cent to 7.4 per cent as economic reforms start to have a positive effect.

Invesco Perpetual
Global growth prospects remain subdued

Economic growth is being boosted by cyclical factors (e.g., consumption, trade). Structural issues, such as high debt, continue to hamper future growth potential. Global liquidity is grinding lower, capping the upside for credit growth in this cycle.

Low inflation is likely to persist

Lack of pricing power and debt overhang will keep inflationary pressures contained; 

There is some upside potential from wages as politics influence wage negotiations; and 

But, the global price of labour will likely remain low.

Core bond yields are capped;

There is long-term structural support for the US dollar

Core bond yields are ultimately driven by structurally lower nominal economic growth; 

Despite near term uncertainty, the US dollar has support from its global funding role; and

Broader policy conflicts are influencing central bank decision making.

Cyclical earnings improvement provides some support for risk assets

US earnings per share is supported by financial engineering, fuelled by loose monetary conditions; 
Expensive credit is vulnerable to policy change;
Equity returns are dominated by dividend income; and
Diversified alpha is an additional source of value.

Volatility is stubbornly low but likely to rise from here
Lingering macro uncertainties suggest equity market volatility is unsustainably low.

Fixed income and currency volatility are sensitive to central bank action. Market volatility is impacted by investor behaviour (e.g.the search for yield).

HSBC Private Banking
While the outlook for riskier assets in 2018 remains constructive, the question of how to invest will be as important as the question of what to invest in for investors, says HSBC Private Banking. 

Equities strong performance in 2017 can be called a "reluctant rally’’ says Jonathan Sparks, head of investment strategy, UK and Channel Islands, HSBC Private Banking.  “Many investors worry about valuations, but in our view, record equity index levels are not a good enough reason to be on the sidelines,” he says.
 
“Synchronised global economic growth, steady earnings growth, ample global liquidity and a very gradual approach of central banks towards raising interest rates all remain in place, so we maintain a mild risk-on stance going into 2018, with an overweight in equities, USD credit and hard currency emerging market bonds.”
 
HSBC Private Banking’s relative preference between markets and favoured investment styles are principally determined by two major shifts in the global landscape: the Pivot to Asia and the Fourth Industrial Revolution.

Pivot to Asia
“China’s 5-year plan, focused both on the level and quality of growth should act as an anchor for economic growth and investment confidence in the region. This coincides with Japanese growth, an economic rebound we expect to see in India, and buoyant regional trade, which all create opportunities for investors,” explains Sparks. 

These factors make EM Asia HSBC Private Banking’s favourite region for equities, with a focus on China, India, Singapore and South Korea. Sentiment towards global emerging markets more broadly should also benefit, motivating an overweight in EM equity and HC bonds.  HSBC Private Banking says that sustained EM growth should help the materials sector, but the growth of China’s new economy, with some of China’s companies now outspending the biggest US technology companies on research and development should also increasingly boost global machinery, engineering and technology companies.

The Fourth Industrial Revolution
The fourth industrial revolution (IR 4.0) may have even broader consequences for investors, according to HSBC Private Banking. ‘While some investors worry that technology stocks are expensive,  the tech revolution should propel areas such as digital consumption, automation and robotics, and the electricity sector where production is being transformed and we are seeing applications in new markets, such as the automotive sector,’ added Sparks. “In our view, IR 4.0 truly makes every company a tech company.”

HSBC Private Banking sees IR 4.0 as generally positive for risk assets, with the strong pace of innovation raising productivity and earnings, and fuelling investment spending and economic growth.  However, it warns that the benefits will not be evenly spread:  “this  is already very clear in consumer retail, and we think it will increasingly affect other sectors, from automotives to energy where stock prices have seemingly decoupled from day to day oil price movements,” continues Sparks.

“With disruption creating winners and losers determining the best mix of bond, credit and equity market exposure is only the first step for investors. For 2018, we think that it is particularly important to consider how to take this exposure.”

The how of investing in 2018
HSBC Private Banking highlights several areas where it anticipates that investors will need to consider a range of potential styles and approaches in order to enhance performance potential in 2018. 

Investing in Style can offer ways to improve the potential risk return profile.
 
•         Technology driven disruption is creating winners and losers, and this makes it more important for investors to consider the relative benefits of an active vs passive approach, or even a long / short approach.
•         Synchronised global growth should support a small- and midcap strategy in 2018. Small caps tend to benefit from improving nominal growth and sometimes have a more local bias than large caps, which can be helpful in areas where local growth is underestimated or improving, or the currency has appreciated, as in the Eurozone.
•         For income-focused investors, policy normalisation requires a tweak to bond strategy. HSBC Private Banking sees the 6-12 month outlook for US high yield debt and hard currency EM bonds as continuing to look appealing, but it is worth adding floating rate notes as the Federal Reserve hikes rates. In equities, HSBC Private Banking anticipates that straightforward dividend strategies may face volatility in 2018, and instead focuses on companies that can sustain or grow their dividends, preferring income strategies that combine dividends with other ways to add to shareholder returns (e.g., buybacks and M&A activity).
•         The hunt for value is likely to be centre stage, as many cite valuations as their primary concern. HSBC Private Banking favours companies where there is a potential trigger for the value to be unlocked.

Alternatives
Investing in alternative assets such as hedge funds and private markets, where appropriate, can provide interesting alternatives to traditional markets.
 
•         The relative differences between interest rate policies in countries such as the US, Japan and Brazil, throw up opportunities that are typically well exploited by hedge funds.
•         Worries about market volatility and timing can be addressed by considering an investment in private equity or debt markets, if part of the portfolio can adopt a long-term approach.

Finally, as a focus on environmental social and governance (ESG) criteria is growing rapidly as an investment approach, companies’ ESG profile is starting to have an impact on performance.
 

Natixis Investment Managers 
More volatility: 72 per cent of respondents are surprised that volatility has been so low for so long, but they don’t think that trend will continue in 2018. 78 per cent expect the stock market will be more volatile and 70 per cent think the bond market will be more volatile next year.

Bubbles: 30 per cent of respondents fear there is a stock market bubble and 42 per cent believe there is a bond market bubble, while 71 per cent say that both institutional and individual investors are assuming too much risk in pursuit of yield.

Biggest threats: Geopolitical events (such as North Korea or instability in the European Union) were seen as the greatest market threats. Next were asset bubbles and an increase in interest rates.

Active management continues to gain favour: 76 per cent of respondents believe that 2018 will be more favorable for active management than passive management.

Sector picks for 2018: Technology (45 per cent), healthcare (44 per cent), and defense/ aerospace (43 per cent) are predicted to outperform the market is 2018.

Alternatives rule: The biggest moves in the year ahead will be increased allocations to non-traditional assets, including private equity, private debt, real estate and infrastructure.  

Russell Investments
Russell Investments strategists believe global growth momentum is likely to persist into 2018, pushing up equity markets over the first part of the year. Japan, Europe and emerging markets are likely to outperform the US Similarly, the euro, Japanese yen, British pound and emerging market currencies may offer investors more potential upside in 2018 than the US dollar. 

“The scenario for global markets in 2018 is likely to be driven by the US which still dominates and is further advanced in its cycle than other economies,” said Andrew Pease, global head of investment strategy at Russell Investments. “Second-hand growth from the global economy could drive a blow-out US rally in 2018, but rising headwinds later in the year are likely to spoil this goldilocks scenario. With Europe, Japan and emerging markets performing well, we believe a globally diversified multi-asset investment strategy offers the best opportunity to find a path between euphoria and danger.” 

The timing of the next US recession will be a critical issue for the global economy in 2018. Further out, the strategists see the risk of a recession in 2019 if additional policy tightening by the Fed causes the yield curve to become inverted. The strategists believe the 10-year US Treasury yield could rise towards its fair value before declining in the latter half of 2018 as recession fears grow. 

“With the labor market at or beyond full employment, spare capacity in the economy closed, and medium-term inflation pressures gradually building, we expect the Fed will be able to raise its policy rate another 100 basis points through 2018,” said Paul Eitelman, multi-asset investment strategist for North America at Russell Investments. 

In contrast to the US, the eurozone is amid a mid-cycle renaissance and at the early stage of its exit from a very loose monetary policy, which the strategists believe may keep core eurozone bond rates rangebound through 2018. The strategists also expect another strong year for the Asia Pacific region, buoyed by an accommodative policy at the Bank of Japan, although re-emergent wage and price inflation may cause the Reserve Bank of Australia to raise rates twice in 2018. 

“The question for investors is how to make the most of late-cycle returns while preparing for the inevitable downswing," said Jeff Hussey, Russell Investments’ global chief investment officer. "Investors need to squeeze every basis point out of their portfolios using smart strategies, implemented in a cost-effective manner, and backed by a dynamic process that leans into opportunities and away from risks.”

Citi Private Bank
Core income strategies Even after rising in 2017, global interest rates remain near multi-decade lows. This creates a significant challenge for investors seeking to generate yield. We believe that potential yield opportunities still exist, however. In fixed income, they include US high yield bonds and variable-rate bank loans, securitized debt, and various emerging market assets.

For investors willing to sacrifice some liquidity we also see potential in private equity and real estate. Having exposure to such varied sources of potential yield may also help to enhance portfolio diversification. 

Emerging opportunities After the strong gains in emerging markets (EMs) in 2017, there may be a temptation to believe the best of the gains are already behind us. Our view, though, is that EMs may offer long-term outperformance potential and that many investors may not have enough exposure to EMs. Overall, EM equities and fixed income are cheap compared to their developed counterparts, as are the currencies in which they are denominated. Our recommended approach is to have a broadly diversified allocation to EM securities, reflecting our overweight to all EM asset classes in every region.

Exploiting volatility Financial markets including US and European equities saw record low volatility in 2017, with others including emerging market equities experiencing falls in volatility. In 2018, we believe volatility will start to rise from its lows, with gradual monetary tightening by central banks likely to be a key driver. While bullish on equities' outlook for 2018, we think there is a case for hedging to help protect prior profits in case our view is wrong and significant downside occurs. We also explore the potential portfolio benefits from hedge fund strategies once volatility returns.

Transforming commerce Firms that disrupt markets often determine whether a particular industry grows or contracts, creating and destroying vast wealth in the process. We appear to be in the early stages of various new multi-year disruptive transformations in industries including robotics and automation and medicine. We see opportunities to invest in 'personalized medicine' among other forms of healthcare technology in 2018. Given the volatility and risks of investing in early stage disruptors, we believe that investment advice, industry research and professional management can more than repay their costs.

Bank of America Merrill Lynch

1.     S&P 500 Index continues to rise: The Standard and Poor’s 500 Index is expected to reach 2800 by the end of next year. Earnings are expected to grow six per cent based on a 2018 EPS forecast of $139. Tax reform could initially add as much as $19 (14 per cent) to S&P 500 EPS (including a potential $3 benefit from repatriation-induced buybacks), but the net recurring benefit would more likely be closer to $11 (eight per cent).

2.     Solid global economic growth: Real global GDP is forecast to grow to a solid 3.8 percent, up slightly from 3.7 per cent in 2017. Above-trend growth is expected in most major economies, with the Euro area maintaining a growth trajectory in 2018 and 2019 of around two per cent and Japan remaining firmly above trend, with nearly 1.5 per cent growth over the same time period. In aggregate, the emerging market economies are expected to grow nearly five per cent in 2018, with China growing 6.6 per cent.

3.     Steady US economic growth: US GDP growth of 2.4 per cent is expected in 2018, up from 2.2 per cent in 2017, but capped by low productivity gains and a slower pace of hiring. The US unemployment rate should drop to 3.9 per cent in 2018, and a tightening labour market will likely allow inflation to pick up. While there are still uncertainties about the final tax reform package, BofA Merrill Lynch economists anticipate a proposed tax cut of $1.5 trillion would add about 0.3 percentage points to US GDP growth in 2018 and 2019.

4.     Inflation is back on radar: Inflation is expected to rise in the US, with core inflation reaching 1.8 per cent at the end of 2018 and two per cent at the end of 2019. Both wage and price inflation also should trend higher, with wage inflation potentially being the most important factor for the stock market in 2018 via margin pressure and credit spreads. Inflation should also increase in China and emerging Europe. In the Euro area, core inflation will likely tick up only very slightly to 1.2 per cent by the end of next year, well below the European Central Bank’s (ECB) 2 per cent target.

5.     Emerging Markets move lower: Higher US rates, a higher US dollar, ECB tapering and Chinese slowdown mean investors will need to be more selective in emerging market bonds and equities, which outperformed in 2017. We maintain our bullish view on emerging market equities into 2018 and expect Asia/EM equities to double in the next two years. Political risks come to the fore with heightened volatility around uncertain geopolitical tension, the outcome of key presidential elections in Latin America, and the renegotiation of the North America Free Trade Agreement. Total credit returns of 3.2 per cent are expected for EM corporates, 1.9 per cent for EM investment grade and 5.4 per cent for EM high yield.

6.     Monetary fiscal policy points to higher rates: The market may be underpricing the risk that US tax reform may be more impactful than expected. Should the market begin to appreciate the implications of tax reform, US rates could make a significant move higher in the first quarter, adding inflation pressure in emerging markets. Ten-year US Treasuries yields could move to 2.85 per cent in the first quarter and toward 3 percent by the end of 2018. Tax reform should also contribute to a wider monetary policy divergence between the US and UK in 2018 as the Fed continues on a gradual path to policy normalization, while the pace of tightening in the UK is impacted by Brexit negotiations and reduction in inflation pressure.

7.     Higher foreign exchange volatility: The US dollar is expected to rally in the first quarter, supported by rising US interest rates and potential repatriation flow occurring as a result of tax reform. Three key triggers could lead to higher foreign exchange volatility: central bank regime change associated with exit from quantitative easing, a reassessment of carry-seeking behaviour, and a repricing of geopolitical risk premium. The dollar index (DXY) is expected to reach 97.00; EUR/USD and USD/JPY should reach 1.10 and 122 respectively, in early 2018.

8.     Modestly constructive on commodities: While higher US interest rates and a strong USD could act as a headwind to commodities, robust global demand and tight supplies should see Brent crude oil rise to $70/barrel by mid-year. Diesel fuel pricing could reach $90 per barrel on rising demand. Fundamentals are improving for US natural gas, with prices reaching $3.30/million BTU, and structural demand, especially from liquid natural gas (LNG) outpacing production grow. Among precious metals, there is limited upside to gold in 2018, with prices expected to reach $1,326 per ounce. A remarkable and unusual copper rally in 2017 could continue into 2018, with copper prices at $3.50/lb by mid-2018.

9.     Credit spreads tighten; disappearing supply: Fundamental trends in the credit markets are divergent, and there continues to be no single global credit cycle. US credit spreads are expected to tighten in the first half of 2018 as excess demand conditions prevail, and then to give that back in the second half. Another year of spread compression also is expected in Europe on corporate bond QE and negative rates. Total returns of 2.2 per cent are forecast for US high-grade corporate bonds with 6.5 per cent total returns from the US high-yield index. In Europe, high-grade corporate bonds are expected to have total returns of 1.5 per cent, with 4.5 percent total returns for high-yield. New issuance of US high-grade bonds could decline 17 per cent, while net supply drops 34 per cent. European supply could be down six per cent, while issuance from Asia should remain flat.

10.  Global Investment Strategy: Stocks are expected to outperform bonds for the seventh consecutive year in 2018, a track record not seen since 1928. BofA Merrill Lynch investment strategists are bullish on stocks, bearish on bonds, long US dollar, and long on volatility. Risk-reward for stocks remains attractive for long-term investors but less attractive for short-to-medium time horizons. Preference is for large caps over small caps, and dividend-growth stocks over high-dividend yield. Technology is expected to win on momentum, despite lofty valuations and bubble-like behaviour. For sector allocations, BofA Merrill Lynch US equity strategists have an overweight stance on technology, materials and financials; marketweight healthcare, consumer staples, industrials, energy and telecom; and underweight real estate, consumer discretionary and utilities. BofA Merrill Lynch equity strategists retain a positive view on European, Japanese and emerging markets.

Nomura Asset Management
One thread runs through our views of the Fixed Income markets for 2018: do not expect sustained drama.

The market still does not believe the Fed’s famous “dot plots” that sees their short-term interest rate rising to more than two per cent on average by the end of 2018. But the market does now believe that an additional hike will hit in December.

Our central view is that a two per cent Fed Funds rate is quite likely in 2018. The Fed has recognised that the economy in the US continues to be relatively strong, despite stubbornly low inflation. The Fed may have even come to the realisation that continued ultra-low interest rates may be contributing to the uncertainty of workers who feel unable to negotiate and demand higher wages from employers. But probably foremost in Central Bank minds is that the employment picture is healthy and continues to improve, and their expectation is that the Phillips Curve will eventually re-assert itself.

Where there is real debate within the team is over what impact this move will have on markets. In theory rate hikes beyond market expectations should feed through to higher bond yields, even at the long end. But some of our team are concerned that a succession of rate hikes could damage the economy, discourage investment and tip the US back into recession, with potentially significant consequences for risk assets and lower long term yields.

This remains a risk scenario for us – on the whole we expect that already ironed-flat yield curves will see limited yield rises at the long end and that the global and US economies will continue their expansion.

As for risk assets, we are cautious. Corporate bond spreads are extremely tight. However, we find it difficult to imagine what could drive them wider. Investors remain long cash and yield-hungry, so buy-on-dips behaviour is likely to continue. From time to time, markets will focus on the creaky fundamentals of one sector or another and politics will make its presence felt (Brexit will rumble on, Italian elections, German coalition talks, FBI investigations, the list goes on). The volatility that these focus shifts bring could be painful in the short term, but will ultimately be swept aside by the continued weight of cash waiting to be invested.

Finally, a word on Japan. It will come as no surprise that we expect accommodative measures by the Bank of Japan to persist, but if core inflation continues to rise towards even one per cent (half the target level) we believe the nature of the current yield curve control measures could change, particularly as a suppressed curve is expected to impact the financial intermediation function in the long term. As for risk assets, where our accounts permit allocation to Japanese convertible bonds, we are long due to favourable risk/reward skew in this market but after recent rapid price appreciation in Japanese stocks, we have been taking some of the indirect equity risk off the table.

The Yen has long term support from Japan’s trade surplus, even if the interest rate differential to the US is rising. We do not hold a strong view on the Yen, however; where we do have long Yen positions, they are held as a hedge to risk-off behaviour.