We believe the synchronized global economic expansion has plenty of room to run in 2018 and beyond—more than many investors think. We like equities and see emerging markets (EM) at an earlier stage of expansion, boding well for EM assets.
The BlackRock Growth GPS (the green line in the chart below) shows that growth among G7 countries is cruising at above-trend rates. Yet consensus expectations have largely caught up with our GPS. That catch-up helped drive risk asset gains this year but now suggests less room for upside surprises to play such a role. Sustained growth amid low market volatility should underpin risk assets—especially if many investors, fearing a near-term downturn, start to embrace the upbeat outlook.
We believe the broad global expansion is not as long in the tooth as many assume. See our 2018 Global Investment Outlook for more. Emerging markets are at an earlier stage of expansion and reinforcing the growth backdrop, benefiting from better trade activity and firmer commodity prices. We expect the EM world to weather any mild slowdown in China. The U.S. may soon receive a decent dose of fiscal stimulus from tax cuts. European economies are posting solid growth but have plenty of lingering spare capacity that could take years longer to absorb. The Federal Reserve is normalizing policy at a gradual pace, while other major central banks are still nurturing recoveries with stimulus.
Our conviction on the expansion’s durability, coupled with still subdued inflation and low interest rates, argues in favor of risk assets. And yet 2017 will be a tough act to follow. We believe returns in many asset classes will be more muted, even as structurally lower interest rates mean equity multiples can stay higher than in the past. We believe equities offer greater upside than credit as the cycle matures. And we see more earnings upgrades next year, though a higher base of comparison will make it harder to top expectations.
We prefer equities outside the U.S., where fuller valuations are less of a drag. We are positive on EM equities due to increasing profitability and relatively attractive valuations. In developed markets, we like tech and financials—with the latter poised to benefit from U.S. deregulation. We also see this environment as positive for the momentum style factor, albeit with potential for sharp reversals. Bottom line: We see the economic expansion—and the outperformance of risk assets—having more room to run. Read more market insights in my Weekly Commentary.
Build on Insight, by BlackRock written by Richard Turnill
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Richard Turnill is BlackRock’s global chief investment strategist, leading investment strategy within the BlackRock Investment Institute. Previously he was chief investment strategist with the firm’s active management business and has also led BlackRock’s global equity team, serving as a portfolio manager. He writes about global markets, the economy and investment ideas.