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January 19, 2018 at 06:01 AM
It’s more than halfway through the first month of the new year; how’s 2018 shaping up?
Larry Adam, Americas CIO and global chief investment strategist for Deutsche Bank Wealth Management, outlined 10 thinks to look out for in 2018.
During a recent press briefing in New York, Adam shared his views and outlook on the markets with Deutsche’s 10 Themes for 2018:
1. Forewarned is forearmed
Deutsche addresses and assesses several market risks and geopolitical concerns that may be ahead.
In the U.S., failure to pass pro-growth reforms could challenge equities. Meanwhile, North Korea remains “the most sensitive geopolitical risk out there.”
Deutsche thinks the Italian elections in March have the potential to spark volatility in global markets. The midterm elections in the U.S. could also pose a risk.
Latin America will see elections in Mexico and Argentina, and the front runner right now in Mexico opposes President Donald Trump.
“The bottom line is that while these may create some bumps, we would view any type of volatility as a buying opportunity,” Adam said.
2. Growth overshadows geopolitics
According to Deutsche, 2018 is expected to see a record low number of countries in recession. According to Adam, only six countries are expected to be in recession this year.
“And they’re countries such as Venezuela, Sudan, Swaziland, Puerto Rico,” Adam said. “The point is that they’re very small. In fact … 99.6% of the global economy is expected to be in global expansion in the upcoming year.”
In most parts of the globe, positive economic data continues to unfold.
3. Central banks in transition
The Federal Reserve is changing. Jerome Powell is replacing Federal Reserve Chair Janet Yellen when her term ends in February. Vice-chair William Dudley, who will retire this year, will also need to be replaced. And there are two more open vacant positions at the Fed.
“The point is, incrementally, the Fed could becoming more hawkish,” Adam said. “The question is: Can they work together in a coordinated fashion to keep the economy moving as quickly as the previous team?”
That same scenario is going to take place over at the European Central Bank.
Over the course of the next two years, five of the six main members of the executive boards of the ECB are going to be replaced (Sabine Lautenschlager, Yves Mersch, Peter Praet, Mario Draghi, Benoit Coeuré and Vitor Constancio).
Draghi’s term is up in 2019. According to Adam, we may see who will become the next leader of the ECB by the second half of this year.
“That could potentially lead to more volatility if a more hawkish leader takes the helm of the ECB,” Adam said.
4. “Flashlight” fixed income
According to Deutsche, there are few opportunities in fixed income.
“Opportunities are a lot smaller than what they’ve been in the past,” Adam said.
Spread levels in all major fixed income sectors are well below average and near historical lows. Relative to all other credit sectors, emerging market bonds have the largest scope for further spread compression.
Deutsche forecasts emerging market sovereign bonds to have the highest total return in the fixed income space in 2018.
Meanwhile, Deutsche’s forecast for the 10-year U.S. Treasury is around 2.6% to 2.7% by the end of this year.
According to Deutsche, yields in the U.S. should move higher as it expects stronger economic growth, tax reform and a tightening Fed to be supportive of rates moving higher.
Deutsche thinks that — while the ECB has announced the continuation of their bond purchasing program — yields should move higher there too, as the pace of purchases slowed beginning in January.
5. Still some oxygen for equities
The MSCI AC World hit 84 record highs in 2017, which is by far the largest number on record. Meanwhile, the S&P 500 rallied for the ninth consecutive year.
Yet Deutsche thinks there may still be some oxygen for equities.
However, Deutsche’s forecast for the equity market this year is “a lot more boring than what you’ve seen in the past,” according to Adam.
