The BlackRock Investment Institute

2018 investment outlook

11 dic 2017

A synchronized global expansion has room to run in 2018. Strong corporate earnings and steady growth support our belief that investors will get compensated for risk-taking in equities, particularly outside the U.S. But 2017 will be a tough act to follow. Geopolitical risks, inflation and other factors could make the road ahead more challenging.

1. Room to run

We believe markets are underestimating the durability of the economic expansion. Many investors fear the end of the market cycle is near, as the gap between potential and actual GDP is shrinking in the U.S. Yet economies can run beyond potential for a long time before peaking.

We see an environment of stable and sustained economic growth.

Take action: Capture global growth

All major regions increased earnings more than 10% for the first time since 2005. Spare capacity in Europe leads us to believe that we will see growth for years, not quarters. We believe emerging market stocks will again outperform in 2018 on rising profitability and investors returning to the asset class. Japan could also be particularly well-positioned.

2. Inflation comeback

We see inflation in the U.S. rising back to a 2% target – a turnaround from fears of near-zero inflation or even deflation two years ago. The Fed looks poised to press ahead and deliver three 0.25% rate increases in 2018. In Europe, however, we share the European Central Bank’s view that inflation may be stuck below target through 2019.

Though inflation was missing in action in 2017, we expect it to return in 2018.

Take action: Prepare portfolios for inflation

We expect core inflation in the U.S. to rise, but only modest upside for prices in Europe. As a result, we see higher U.S. yields ahead and prefer inflation-protected bonds over the nominal variety.

3. Reduced reward for risk

Valuations of risk assets have risen, market volatility has stayed low, and many perceived risks have not materialized – making markets more vulnerable to temporary sell-offs. While we don’t see any major risks triggering a sustained higher-volatility regime, this is precisely when fixed income as a risk management tool is critical.

Fixed income and duration continue to play an important role as a buffer to potential volatility.

Take action: Use bonds to diversify equity risk

We believe investors will still get compensated for taking risk in 2018, but staying invested through inevitable drawdowns will be key. Portfolios on the moderate to aggressive risk spectrum should consider adding duration to provide the proper ballast to risk assets.