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With global savings and investment having peaked recently, we remain in a demand deficient world, looking for the next region, country or sector to increase borrowing and spending. Until then, demand will likely fall short, and we’ll muddle through.
In this environment, markets have performed well, maybe too well, driven by financial repression and the thirst for yield. We’re in a “lower for longer” bond yield environment as inflation in advanced economies decelerates and major central banks—the Bank of England, European Central Bank and Bank of Japan—pursue quantitative easing (QE). The search for yield has pushed investment flows toward riskier assets such as high yield and emerging markets (EM). Spreads have tightened and stocks have done well. But we fear markets may be disappointed if we miss 3% global GDP growth expectations and S&P 500® Index operating profits rebounding by 10% to 13% in 2017.
We need economic execution and an exit from the profits recession to justify the recent rally in risk assets. If we’re right, and EM growth is bottoming while developed market growth is steady, then market valuations should eventually line up. Every quarter, we update our forecast map.
Read on for our global highlights:
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This blog post is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Information, including that obtained from outside sources, is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization. This information is subject to change at any time without notice. Market conditions are extremely fluid and change frequently.
