The recently released BlackRock Investment Institute (BII) 2018 outlook paints a positive picture for the financial markets over the next 12 months. While many industry insiders expect the current cycle to end at some point next year, the world’s largest money manager expects the current expansion to last for another two years at least.
“That outlook is not the consensus view among most economists, but we’re measuring the current expansion in years, not quarters,” says Kurt Reiman
, Chief Investment Strategist for BlackRock Canada. “If we’re right, and the economic expansion really does gain traction and investors start finally believing in it, it could be good news for risk assets even after the impressive run we’ve had this year.”
Despite the positivity, Reiman does expect the nature of next year’s performance to differ from 2017. The fundamentals this year have been extremely positive: economic growth has been impressive in most regions and interest rates have remained accommodative, despite increases from some central banks.
“Global earnings growth got supercharged this year, with almost every country delivering more than ten percentage points growth, which is an almost perfect environment for risk assets,” Reiman says. “Now, valuations are higher than a year ago, there are a fair number of geopolitical concerns, and central banks will start to limit the amount of accommodation. So, I think it will be more challenging but that doesn’t mean you can’t seek out opportunities.”
Reiman believes equities markets still have room to go up, but thinks the growth will be driven by earnings and dividends and less by multiples expansion. “The sectors that are going to emerge as winners are value sectors that haven’t been in the leadership position, like energy and financials,” he says. “For investors who are reluctant to move their assets overseas to emerging markets, japan or Europe, that story still holds and I think there is still more juice to squeeze out of that story.”
The phenomenal performance of tech stocks has been one of the most significant stories this year. In the U.S., tech stocks are up almost 40% when dividends are factored in; in China, tech stocks are up close to 100%.
“The market moved up alongside earnings growth, so prices didn’t really get that much more expensive,” Reiman says. “It’s been such a big year that we are starting to see tech take on a large share of the market cap globally, especially in emerging markets. Investors might be scratching their heads and wondering if this is as good as it gets, but we think there is still room for upside. The tech sector is not very well represented in Canada, and that’s one of the reasons why the Canadian equity market lagged this year.”
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