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BOSTON & LONDON–(BUSINESS WIRE)–State Street Global Advisors, the asset management arm of State Street Corporation (NYSE: STT), today released its Global Market Outlook for 2018 – Step Forward, Look Both Ways – predicting that the coming year will be supportive of risk assets. However, the maturity of the growth cycle and a number of structural uncertainties will warrant a degree of caution.
State Street Global Advisors forecasts more evenly distributed global growth, which it expects to return to its historical trend rate of 3.7 percent in 2018, supporting company earnings and pushing equity markets even higher. The firm sees the best opportunities further down the cap spectrum within the US, and views developed markets such as Japan and Europe as particularly attractive.
“The slow but steady improvement in global growth, coupled with modest inflation, provides the kind of macro environment that can continue to lift markets higher,” said Rick Lacaille, global chief investment officer for State Street Global Advisors. “Valuations, although extended in some sectors, remain below fair value at current interest rate levels. Japan is arguably the most attractive developed market, given relatively low interest rates and a weak currency.”
The firm also expects that the ongoing move away from extraordinary monetary policy accommodation, alongside evidence of lower cross-asset class correlations, could be more conducive for active equity managers.
“Historically low interest rates and policy-driven liquidity following the global financial crisis have challenged active managers through higher correlations and lower volatility,” said Lori Heinel, deputy global CIO for State Street Global Advisors. “That backdrop is changing. However, careful consideration of where, when and how to go active is essential in order to strike the right balance alongside smart beta and core index exposures.”
State Street Global Advisors also sees more opportunity in bond markets. While further rate rises from the US Federal Reserve (Fed) and European Central Bank (ECB) are in store despite low inflation, the firm expects rates to stay anchored at a relatively low level.
“While we are unlikely to see the bond bull to keep charging in 2018, we do think the bears will probably be proven wrong for another year, even as the Fed is expected to raise rates and other major central banks begin tapering their accommodative policy. That said, investors need to balance duration and credit risks carefully. While emerging market debt valuations have become less attractive, a tilt towards quality can continue to deliver results,” added Lacaille.
State Street Global Advisors tempers its outlook with a degree of caution recognizing that, eight years into the growth cycle, some investors are increasingly wary of the potential for a pullback.
“While volatility remains low, the SKEW Index continues to be elevated, suggesting investors are worried about a low-probability, high-impact market correction. We are at that point in the cycle when investors should review the tail risk protection in their portfolios. The fundamental backdrop remains favorable, however. We think investors should look both ways. They should take a more cautious and risk-aware stance as they step forward to make the most of the opportunities that synchronized global growth will likely offer in 2018,” Heinel concluded.
To view the full Global Market Outlook, click here.
About State Street Global Advisors
For nearly four decades, State Street Global Advisors has been committed to helping our clients, and those who rely on them, achieve their investment objectives. We partner with many of the world’s largest, most sophisticated investors and financial intermediaries to help them reach their goals through a rigorous, research-driven investment process spanning both indexing and active disciplines. With trillions* in assets, our scale and global reach offer clients unrivaled access to markets, geographies and asset classes, and allow us to deliver thoughtful insights and innovative solutions.
State Street Global Advisors is the investment management arm of State Street Corporation.
*Assets under management were $2.67 trillion as of September 30, 2017. AUM reflects approx. $36 billion (as of September 30, 2017) with respect to which State Street Global Advisors Funds Distributors, LLC (SSGA FD) serves as marketing agent; SSGA FD and State Street Global Advisors are affiliated. Please note that AUM totals are unaudited.
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Expiration Date: 12/31/2018