Q4 Investment Outlook

With limited evidence of excess in the global financial system and mostly low interest rates around the world, I am optimistic about global economic prospects. Here’s a snapshot of the major themes I’m watching:

• Global growth: The expansion is poised to continue, led by growth in emerging economies. The US dollar’s decline relative to other currencies year to date has been a key driver of emerging market (EM) asset performance and has supported US multinational corporate profits.
• Monetary policy: I think monetary policymakers will shift gears slowly, removing accommodation over a period of years and at a pace in line with economic fundamentals. Central banks have telegraphed their policy changes, which has helped reassure investors that a policy error is less likely.
• Government bond yields: Developed markets should see higher government bond yields in the future, but the trajectory looks low based on a benign view of inflation and monetary policy over the near to medium term.
• Risk assets: Globally, corporate profits are in a synchronized upturn for the first time since 2006. Valuations, whether option-adjusted spreads on credit indices or equity P/E multiples, remain on the high side, but profit growth should remain a key pillar of support. If monetary accommodation is removed carefully—and barring unexpected events that could dramatically raise market risk—I think many asset classes could generate positive absolute annual returns over the next 12 months, although perhaps less than historical averages.
• US dollar: The US dollar should stay stable or slightly weaker relative to global peers, particularly in EM, where economic growth in aggregate has been outpacing the US.

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