Global Investment Outlook 2018: Reflections on Growing Economies and Fading Stimulus

As markets shift away from the recovery era of monetary accommodation amid synchronized global growth, some investors may be wondering where potential opportunities can be found. We present a summary outlook for the year ahead from Franklin Templeton’s global macro, fixed income, equity and multi-asset investment teams. They highlight why they think US interest rates look poised to keep heading higher, why global equities may have more room to run and why investors may need to be more selective in the fixed income space.

Global Macro

Michael Hasenstab, Ph.D.

Executive Vice President,
Chief Investment Officer,
Templeton Global Macro

Rising US Treasury Yields Present Multiple Risks

  • A number of factors are poised to pressure US Treasury yields higher, in our view: the reversal of quantitative easing (QE) as the US Federal Reserve (Fed) unwinds its balance sheet, the exceptional strength in US labor markets, rising wage and inflation pressures, ongoing resiliency in the US economy, and a structural shift toward deregulation by both the Trump administration and potentially a Jerome Powell-led Fed.
  • Investors who are not prepared for the shift from the recovery era of monetary accommodation to the expansionary post-QE era may be exposed to significant risks, in our view. We think it is critical not only to defend against current US Treasury risks but to structure portfolios to potentially benefit as rates rise.

Specific Emerging Markets Offer Idiosyncratic Value

  • The impact of Fed policy tightening on emerging markets should vary from country to country in the upcoming year.
  • It’s important to identify countries with idiosyncratic value that may be less correlated to broad-based beta (market) risks. Countries that are more domestically driven and less reliant on global trade often have those idiosyncratic qualities along with inherent resiliencies to global shocks. A select few have already demonstrated that resilience in recent years, notably Indonesia. For others, we believe economic risks are related to the reforms underway within their country, rather than what happens externally, such as in Brazil or Argentina.
  • In the major developed economies, we continue to see unattractive bond markets, particularly the low to negative yields in the eurozone and Japan.

We Expect Inflation and US Treasury Yields to Rise in 2018

  • As we look ahead in 2018, we expect the reversal of QE, rate hikes and rising inflation pressures in the United States to be among the most impactful factors for global financial markets.