After solid gains this year in most asset classes, investors are asking how long the momentum can continue — and which strategies to potentially harness growth, generate income and manage risk may make the most sense heading into 2018.
Despite some initial uncertainty, markets rewarded investors with solid returns across almost all major asset classes in 2017 – fueled by a slow but steady increase in the breadth and depth of global economic growth. Heading into 2018, Legg Mason’s investment managers see few reasons to expect this positive environment to deteriorate.
Ironically, that good news has many investors wondering how long the trend can continue, with bullish sentiment relatively muted. While that typically is a signal that stocks may have more room to run, there are still risks worth watching – and given current valuations, gains next year may almost certainly require the kind of selective approach to sectors and securities practiced by active managers.
Against this background, how can investors approach the goals that drive portfolios: harnessing growth, generating income and managing investment risk?
2017: Many happy returns
Total return by asset class, 2017 YTD (%)
Source: Bloomberg, December 1, 2017. Past performance is no guarantee of future results. US High Yield is represented by the Bloomberg Barclays Corporate High Yield Index; US fixed income is represented by the Bloomberg Barclays US Aggregate Index; world bonds are represented by the Bloomberg Barclays Global Aggregate Index; world stocks are represented by the MSCI All-Country World Index. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
"The dominant trend leading into 2018 is the breadth, depth and strength of the current economic expansion."
— Brandywine Global
"We appear to have moved from a low-growth, low-inflation environment to … the so-called ‘Goldilocks’ scenario of higher growth and low inflation."
— Martin Currie
Positive fundamentals should continue
Economic conditions appear positive in nearly all regions -- the first time that global growth has been this synchronized since 2011, with no major economies mired in recession.
This expansion has yet to provoke a major uptick in inflation, and for 2018, the International Monetary Fund projects it to average 1.7% in advanced economies before converging on 2% over the medium term. This benign scenario reflects in part the finesse major central banks have shown in gauging the pace of recovery and effectively communicating their planned changes of monetary policy to financial markets.
But with few other obvious economic risks on the horizon, the possibility of a misstep by the Federal Reserve (Fed) or European Central Bank (ECB) assumes greater importance in the months ahead. There’s also the possibility of an unexpected bump in China’s growth trajectory. But encouragingly, China has taken concrete steps to tame its bond markets, while increasing its integration with the global financial system -- and focusing on the quality of its growth rather than just raw numbers. Finally, there is the “x-factor” of political risk. Resurgent nationalism and anti-globalist movements have already impacted financial markets – mostly notably via President Donald Trump’s election and the Brexit referendum – and could do so again in 2018.
None of this demands a defensive posture from investors, but it would be a mistake to be entirely complacent. Timing the markets is a dangerous game; in this environment, it makes more sense for investors to focus on making sure they are well-positioned to pursue personal goals:
- Enjoy a healthy return on wealth ➜
- Generate income, both today and tomorrow ➜
- Manage the risks inseparable to investing ➜
1 Source: International Monetary Fund, World Economic Outlook, October 2017
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