2018 Outlook: Global Momentum
Todd Mattina, Chief Economist and Strategist on the Mackenzie Asset Allocation Team, says the cyclical upswing in many major economies looks set to continue in 2018.
TODD MATTINA: In 2017, the global economy enjoyed a surprisingly broad and synchronized uptick in real GDP growth with low inflation. The upswing in the global economy reflected several factors including stronger manufacturing activity, a rebound in real investment spending, stronger consumer and business confidence, firming commodity prices and loose global monetary policy, which helped ease financial conditions. Markets rewarded investors for taking risk in this ‘Goldilocks’ scenario of strong growth and low inflation. Stocks in developed markets increased by over 20%, led by the tech sector, while in Emerging Markets stocks gained over 25%, all in local currency terms. The TSX relatively underperformed other major equity markets but stocks continued to be rewarded relative to risk-free Canadian government bonds as yields rose in Canada in 2017.
In our own portfolios, we maintained our tactical overweight in global stocks relative to government bonds. We initiated that position entering the third quarter of 2016, but we gained further conviction in that view and further increased our tactical overweight in stocks. This benefitted our portfolios and investors as they were able to participate in the impressive global equity rally.
The broad cyclical upswing in most major economies looks set to continue in 2018. A number of factors support this continued momentum. First, tax cuts in the US, which will add over US$1 trillion to the public debt over the next 10 years, will provide fiscal stimulus in the near term, boosting business investment and personal spending. Second, global monetary conditions look set to continue being accommodative as direct asset purchases by Europe’s ECB and the Bank of Japan offset balance sheet reductions by the US Fed as it attempts to reduce its bloated $4.5 trillion balance sheet. And third, many of the world’s major economies still have ample spare capacity to continue growing rapidly and above their long-term trend rates, including in Europe, Japan and many Emerging Markets. In particular, many Emerging Markets look to have a bullish 2018 ahead of them. For example, they have a firming of commodity prices, a rebound in global trade growth and easy global financial conditions in the search for yield.
Here in Canada, we still see growth growing above the long-term trend rate, at about 2.25% in 2018. While we see stronger business investment in exports in the next year, personal spending could be potentially slower than in 2017 as the pace of housing gains begins to cool and higher interest rates in 2018 begin to weigh on the heavily-indebted consumer sector where debts stands at about 170% of disposable income.
Given the favourable economic backdrop, we believe a number of pro-cyclical asset classes and investment strategies will continue to outperform in 2018. Three of our conviction views include a continued overweight in global stocks relative to government bonds. Second, within the equity sleeve an overweight in Emerging Market equities. Third, in currencies, an underweight in the US dollar relative to the loonie and an overweight in the euro relative to the Canadian dollar.
For more of our insights, please refer to the latest edition of Mackenzie Express.
- Several factors support the outlook for a continued cyclical upswing in most major economies in 2018, especially in Emerging Markets.
- Canada will see economic growth that’s above its long-term trend rate in 2018.
- Our tactical views include being overweight global stocks relative to government bonds and being underweight the greenback versus the loonie.