Global Strategy Q1 2018
The global economic environment remains favorable. The Fed will shrink its balance sheet in 2018 and gradually raise interest rates. The ECB is likely to continue with its asset purchases at a reduced pace until September and discontinue them by the end of the year. In this environment we continue to favor stocks, as well as IG hybrid and HY corporate bonds. Safe government bonds should suffer price declines as the year progresses, we expect a moderate increase in yields.
Economy: US economic growth has accelerated significantly after a weak Q1 and this strong economic performance should continue. Although the unemployment rate is already very low, no signs of overheating are detectable so far, as wage growth remains stable at a moderate level. We are forecasting GDP growth of +2.4% y/y in 2018. The euro zone economy benefits from strong foreign trade and solid domestic economic activity. Industrial capacity utilization is likely to boost investment spending in the coming year. Overall we expect the strong momentum of economic growth to be maintained in 2018 with GDP growing at +2.4% y/y. However, the improvement in headline inflation proves quite protracted in view of moderate wage growth. We expect headline inflation to increase slightly in 2018 and reach +1.6%.
Bonds: The ECB continues to regard an ample degree of monetary stimulus as necessary and has set a predictable monetary policy course until September 2018. We expect that it will only take steady increases in the pace of inflation for the ECB to taper off its asset purchase program by the end of the year. Currently the bond market shows little reaction to this. We believe yields on German Bunds will remain at low levels for now. Yields should begin to rise in the course of the year though, once wage growth accelerates and triggers a surge in inflation expectations. The Federal Reserve should maintain its policy of gradual rate hikes in the coming year end we expect three more rate hikes. This prospect is not fully priced in yet by the short end of the market. Strong economic data, a potential stimulus from tax cuts, a further decline in the unemployment rate and a possible acceleration in wage growth should exert a negative impact on government bond prices.
Currencies: The markets should place more weight on rate hikes in the US than the prospective end of the ECB's bond purchases, hence we expect the US dollar to appreciate against the euro. In the current favorable economic environment, demand for safe havens is waning, and we expect the Swiss franc to weaken moderately against the euro as the year progresses, as well as a mild decline in the gold price in the first quarter.
Stocks: The global economic upswing is reflected in rising revenue and earnings estimates for listed corporations. In view of expected earnings growth, partly higher valuations (i.e., P/E ratios) do not appear excessive yet. Accordingly we expect global stock markets to post another slight gain in the 1st quarter of 2018, in a range from 0% to +5%.