Mid-Year Global Market Outlook: Diverging Markets Call for Skilled Stock Pickers
State Street Global Advisors, the asset management business of State Street Corporation, published its 2018 Mid-Year Global Market Outlook, offering insight into the near-term future of global markets. The report states that as momentum falters in markets outside the US, investors will need to look more carefully for pockets of opportunity. The biggest downside risk remains protectionism, as trade battles move beyond rhetoric to retaliatory tariffs. Therefore, a more selective, defensive approach is recommended for the remainder of 2018.
“As we head into the second half of the year, many of the core views we expressed last December remain intact,” said Rick Lacaille, global chief investment officer at State Street Global Advisors. “Solid growth and contained inflation should continue to support risk assets, though we now prefer US equities, as Europe and Japan struggle to match last year’s strong performance. We continue to find attractive opportunities in emerging markets, both in equities and local currency debt, though investors need to pick their spots carefully, as dollar strength, higher oil prices and geopolitical risks play out differently across the asset class. We are also taking a selective approach in fixed income, seeking opportunities in quality names higher up the credit spectrum.”
US Equities Continue to Rise
Following stellar first quarter results in which the S&P 500 companies were on track to post a nearly 25 per cent increase in earnings compared to last year, investors rewarded companies in early May as the US equity market retraced its year-to-date losses. US tax reform is driving strong capital investment as companies reporting by the end of April indicated capital spending increased by 39 per cent, the fastest rate in seven years.
“Despite concerns about overheating the US economy with significant fiscal stimulus at a time when unemployment is at a 17-year low,” said Lori Heinel, deputy global chief investment officer at State Street Global Advisors. “The Federal Reserve seems ready to let the stimulus take its course and raise rates gradually, even if the economy overshoots its two per cent inflation target for a time.”
Momentum Wanes in Europe and Japan
Elsewhere in the developed world there appear to be signs of faltering growth, with momentum waning in Europe, and Japan’s more severe labour shortages constraining its high-water mark for growth. “For every 100 Japanese job seekers, there are 159 vacancies, with unemployment at 2.5 per cent, nearly a 25-year low,” said Kevin Anderson, head of Investments in the Asia Pacific region at State Street Global Advisors. “The Japanese economy is running out of spare workers, limiting further growth. Having said that, we continue to find attractive companies to invest in, as the Bank of Japan keeps monetary policy loose and company earnings reach all-time highs.”
Given the uncertainties surrounding late cycle markets, State Street believes investors should review portfolio defenses in the form of hedging, greater diversification and allocations to uncorrelated assets. Still, skilled managers can find opportunity in volatility, while seeking to steer away from the biggest drawdown risks.