A confluence of global synchronized growth, accommodative money policy and positive political reform in Europe should lead to continued double-digit returns for foreign equities in 2018, according to the Northern Trust CIO Bob Browne.
“We feel positive on European growth, Abenomics is certainly working in Japan, and we’re not expecting a hard landing in China,” Browne told ThinkAdvisor, adding that the two largest economies in the world, the United States and China, will continue to do “quite well.” The Northern Trust forecast for equity returns in 2018 is 13.4% in developed markets outside the U.S., mostly in European markets and Japan, and 13.1% return for emerging markets.
Through Dec. 18, France’s Cac 40 Index is up about 20%, while Germany’s Dax Index is up nearly 25%. In comparison, the S&P 500 is up almost 19%, Japan’s Nikkei 225 is up nearly 17%, while the United Kingdom’s FTSE is only up 5% for 2017.
Three key factors will determine continued growth, Browne says. The first is the “whole world is contributing to and benefitting from synchronized growth. It’s the first time we’ve had this virtuous cycle with the developed world, including U.S., Europe and Japan,” he says. China, he added, which is the “most significant component of the emerging markets and overall world,” will slow down, but that will be to 5% from 7% on a $12 trillion economy.
A second factor is that accommodative monetary policy will continue throughout the world. Browne says the Fed most likely will move only once next year, as opposed to the consensus of two times and the Fed’s three-time prediction. As an aside, he added, “the Fed is always wrong, by the way.” He points out that last week’s meeting of the Fed was “quite interesting” in that there were two dissents. He says they don’t see “the Fed as aligned in the future as it has been in the past.”
Another key global growth factor will be positive political reform in Europe. He points out that France and Europe are benefitting from “the first real potential of positive Labor reforms that go beyond what [French President Emmanuel] Macron has done,” Browne says.
“[Macron] is making some real changes, things people would have thought were impossible from both political parties, right and left, [and in the past] couldn’t get done. He’s getting Labor to make important concessions and trying to lower tax rates.” Further, as he has a “powerful parliamentary majority” for the next several years, “ [so] he can take the pain up front for a longer-term gain.”
In addition to France, Germany re-elected Prime Minister Angela Merkel, who has a unified coalition that supports a strong Europe, he says. “The politics in Germany are a bit messier [than in France] but it’s a very stable democratic system.”
Northern Trust still categorizes Brexit as a “risk” and Browne says, “Without a doubt, an ugly break with Brexit would be bad for the U.K and have implications for Europe. But it seems like they are going to kick the can [down the road] and have various delays and a long transition period.”
Longer term, Northern Trust Capital Market Assumptions 5-year forecast sees modest-growth and low inflation, allowing valuations in stocks to remain elevated. It forecasts that Emerging markets will see the strongest total returns with a forecasted 8.4%, followed by Europe with 7.2%, the United Kingdom at 6.6 %, Japan at 6.0% and the U.S.at 5.9%.
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