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Market outlook

June 2017

US

  • The US equity market ended the month in positive territory, boosted by strong jobs report and a rise in consumer spending.
  • Positive economic data raised the prospect that the US Federal Reserve would hike rates, with the US once again poised to lead a global recovery.

Europe

  • European equity markets continued their advance in May. Stocks performed strongly as the victory of pro-Europe centrist Emmanuel Macron in France’s presidential elections resolved uncertainty about the outlook.
  • Despite the cyclical improvements, structural headwinds surrounding Brexit, as well as high levels of excess leverage and negative geopolitical developments are likely to constrain growth in the region.

Japan

  • Japan’s equity market ended the month higher, benefiting from solid corporate earnings results and the French presidential election result.
  • Companies are still focusing on cleaning up their balance sheets, where progress continues to be gradual. The loose monetary policy environment in Japan is likely to continue, but the yen’s depreciation will likely be limited by overseas development.

Asia ex-Japan, Hong Kong & China

  • Asian equity markets ended May higher as positive earnings revisions and results of the French presidential election aided global risk.
  • Although cyclical conditions have been improving, we recognize that the structural excesses in capacity and leverage have yet to be reduced in a meaningful manner throughout the region.

Hong Kong 

  • China equities rose as the People’s Bank of China signaled that steps taken to reduce financial risks would not negatively impact market liquidity. Hong Kong equities rose on the back of favorable earnings and positive macro news.
  • In China, growth conditions have improved, but there are still a number of external and domestic challenges that may weigh on growth going forward.

Fixed Income

  • A combination of ongoing improvement in the eurozone economy, a supportive European Central Bank and reduction in political risk helped European corporate bonds to outperform government bonds through May.
  • Global government bonds are likely to face some headwinds from the potential for an increase in fiscal spending, a continuation of the cyclical recovery and potential for inflation to re-surface as a result of more aggressive stimulus policies.

Emerging Markets

  • It was a positive month for emerging equity markets as they outperformed their peers in the developed world. Emerging Asia was the strongestperforming region.
  • Given the challenges China (the largest emerging market) faces, the outlook for commodity exporting emerging economies will remain mediocre at best through 2017.

UK general election: Ruling party dismay at loss of majority

Economic insights

Economic insights

On Friday night (9 June 2017), British election delivered a blow to the ruling Conservative party, who lost their Parliamentary majority. The final outcome will likely leave the Conservative party with 319 seats compared with the Labour Party’s 261 seats, resulting in a hung Parliament (326 seats is the minimum requirement for a majority in the 650-seat Parliament). This is all against the background of the upcoming Brexit negotiations scheduled to begin on June 19.

British Prime Minister, Theresa May called for a General Election six weeks ago to increase the Conservative Party’s Parliamentary majority from the 331 seats they held prior to yesterday’s election. In addition, it was widely believed that the leader of the Labour party, Jeremy Corbyn was unelectable, given how far left his political policies were. However, as the election neared Corbyn proved to be surprisingly effective and his policies became increasingly popular.

Asian Insights Q1 - 2017

Asian equities: profitability, policy and reflation myth

Asian equities: profitability, policy and reflation myth

2017 so far has seen equity markets in Asia off to a positive start, and as a result, global investors are gaining more confidence in their outlooks. Along with global markets, Asian equities have moved forward in parallel led by economic sensitive sectors, while dragged by defensive sectors.

As the year progresses, we believe three key areas may have an impact on Asian equity markets: an improvement in profitability for Asian corporations, spurred by growth in certain sectors; global policy uncertainties impact to Asia will not be as significant and has been exaggerated by the market; and the myth of reflation, at least for the case of Asia.

Fed hikes short term rates for third time in 15 months

Fed’s constructive growth and inflation outlook likely paves the way for further hikes

The US Federal Reserve (the Fed) hiked its benchmark short-term interest rate by 25 basis points today, as expected. The statement was generally neutral, in our view, with upbeat commentary around the current growth backdrop. Inflation commentary was more mixed, stating that headline inflation has moved closer to the Fed’s target, yet emphasizing that core inflation continues to run below the Fed‘s target. Overall, the statement was similar to the January‒February statement, meaning that little has changed to alter the Fed’s view since then.
The Fed also released its widely anticipated Summary of Economic Projections (SEP), which includes the forecast of the federal funds rate or the so-called “dots.” The projected year-end 2017 federal funds rate indicates three rate hikes, unchanged from December’s SEP release, while the bond market had only been pricing in two prior to today’s announcement.1 The longer-run federal funds rate was unchanged at 3.0%. Growth and inflation projections were largely unchanged with only a slight upward revision to 2017 core inflation, from 1.8% to 1.9%.2
In her press conference, Fed Chair Janet Yellen stated that an unchanged SEP is consistent with gradual rate increases over time. The Fed is discussing and monitoring fiscal policy changes but has not yet included potential impacts in its projections. Therefore, federal funds rate projections were left unchanged.

Looking ahead
Given our constructive outlook for global growth, our base case view has been that the Fed will likely hike rates three times in 2017. We expect the bond market to continue to converge toward this view. We believe that risk assets will continue to be supported by a better global growth picture. If the market abruptly begins to price in more than three Fed hikes (four or more) or it believes that the Fed is behind the curve (meaning that it believes the pace of rate hikes is too slow), we would look to scale back this view, as this concern could lead to a risk-off environment.

1 Source: Bloomberg L.P., March 15, 2017.
2 Source: federalreserve.gov, March 15, 2017.

 

2017 Investment Outlook

After the challenges of the past year, our investors provide insights into what lies ahead.

After the challenges of the past year, our investors provide insights into what lies ahead.

This past year has been marked by a series of macro events that helped shape a dynamic, challenging market environment. The UK’s vote to withdraw from the European Union, oil price volatility, a contentious presidential election in the US and slowing growth in China all contributed to major market moves. With this as prelude, the year ahead promises to be interesting and challenging as well.

At Invesco, we’re dedicated to delivering an investment experience that helps people get more out of life. In fact, our entire firm has been built over many years with a single focus: to help clients achieve their investment objectives.

With more than 6,500 employees and an on-the-ground presence in more than 25 countries, Invesco is well-positioned to meet the needs of investors across the globe. We provide a comprehensive range of investment capabilities and outcomes, delivered through a diverse set of investment vehicles, to help clients achieve their investment objectives.

Our experienced investment teams are located in key cities all over the world, which we believe is a real strength of our firm. Maintaining investment teams in major markets enables us to stay on top of developments that impact the markets and companies in which they invest.

An important part of achieving your investment objectives may be keeping ahead of the dynamics that drive movements in the global markets. Working with our investment teams, we’ve developed this 2017 outlook to provide insights that could help you plan for the future or make decisions about your investments.

We hope you find this information helpful, and remain focused as always on helping clients meet their investment objectives ... wherever the markets take us.

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