Macro: Global Inflection Point Nears
| 1 | “Goldilocks” Gives Way to Something More Complicated Though the strength of global economic momentum is undeniable, a confluence of factors—including tightening central bank policy, plateauing economic growth and rising market volatility—suggests that conditions are unlikely to remain “just right” for all of 2018. |
| 2 | Both Monetary and Fiscal Policy Are in Motion Globally As major central banks wind down unprecedented levels of monetary stimulus, their efforts are being met—and potentially complicated—by expansionary fiscal policy and reform initiatives taking root in a number of countries. |
Risks: Clouds Gather as the Year Progresses
| 3 | Geopolitical Climate Remains Unsettled Though 2017 mostly failed to deliver the electoral fireworks of 2016, elections this year in Italy, Mexico, Brazil and the U.S.—in addition to ongoing disrupters like North Korea, special investigations, Brexit, etc.—could upset the current order. |
| 4 | China Accelerates Structural Reforms An emboldened Xi will be more aggressive in reducing leverage and re-orienting China’s economy toward more sustainable, high-quality development, to the potential detriment of near-term growth. |
Fixed Income: The Chase Continues
| 5 | No End to the Search for Yield Biased higher but still low, long-term interest rates continue to send investors into less-familiar corners of the fixed income markets in the hunt for yield, with high valuations leaving little cushion to absorb a volatility shock. |
| 6 | Credit Drivers Begin to Change Continued low default rates suggest global credit spreads likely will be impacted less by fundamentals and more by technical developments such as hedging costs, LDI-related flows and regulatory changes. |
Equities: Two-Way Markets Return
| 7 | Market Momentum Could Present Opportunities to Reduce Beta Exposure Strong earnings growth could fuel equities in early 2018, providing investors with chances to trim holdings in high-valuation stocks and redeploy into more attractive risk-adjusted exposures. |
| 8 | Active Management Positioned to Shine Market dynamics continue to shift in favor of active management, which could extend the comeback mounted by stock pickers last year after a period of underperformance. |
Alternatives: Finding Opportunities Amid High Valuations
| 9 | Low-Vol Strategies for a More Volatile World Market-neutral and relative-value hedge funds may help investors earn returns with lower volatility. |
| 10 | Sharpen Quality Focus in Private Assets Given high private equity valuations, investors can help mitigate risk by targeting experienced private equity sponsors with a history of adding operational value or by moving up the capital structure to first-lien private debt. |
View Solving for 2018 for more insights from our senior investment leaders.