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2018 Investment Outlook

We are dedicated to helping clients achieve their investment objectives

We are dedicated to helping clients achieve their investment objectives

The surging markets of the past year have taken place against a backdrop of macro developments whose long-term impact on the world economy has yet to be realized:  uncertainty regarding the UK’s withdrawal from the European Union, potential tax reform in the US, North Korea’s nuclear weapons testing, continued oil price volatility and the outcome of key elections in Germany, France, Iran and other countries.

With this as context, the year ahead promises to be interesting and challenging as well.  In this dynamic environment, we have a strong view that clients are best served by portfolios that combine the advantages of active, passive and alternative capabilities.

At Invesco, we’ve built our firm over many years with a single focus:  to help clients achieve their investment objectives in a variety of markets.  We provide a comprehensive range of investment capabilities, delivered through a diverse set of investment vehicles.  We draw on this comprehensive range of capabilities to provide customized solutions designed to deliver key outcomes aligned to client needs, which are our most important benchmark.

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

An important part of achieving your investment objectives depends on keeping ahead of the dynamics that drive movements in the global markets.  Working with our investment teams, we’ve developed this 2018 outlook to provide insights that can help you plan for the future and make decisions about your investments.

We hope you find this information helpful.  As always, we remain focused on helping clients achieve their investment objectives – wherever the markets take us.
 

Market outlook

November 2017

US

  • The US equity market rose in October, boosted by solid earnings and economic growth. The third quarter GDP rose at an annual rate of 3%, higher than expected. Technology stocks were the leaders.
  • We are positive on US economy, supported by strong economic growth in third quarter. The ambitious tax reform and favorable unemployment rate also help the economy continue to improve.

Europe (including UK)

  • European equity markets advanced in October amid solid economic growth and modest inflation. The Eurozone GDP growth stood at 0.6% for the third quarter, beating expectations. The UK equity market rose, against a backdrop of rising oil prices and continued monetary tightening.
  • We maintain a positive view on European equities, supported by strong economic activity indicators, solid earnings delivery and attractive valuations. The European Central Bank decided to reduce its bond-buying volume, which clearly acknowledges the robust and sustainable uptick in the European economy.

Asia Pacific (ex Hong Kong ex China ex Japan)

  • Asian equity markets rebounded strongly in October, with new record highs for a number of markets. South Korea was the best performing market. IT sector was the strongest performer in the region, followed by energy.
  • We remain positive on Asia ex Japan equity markets as steady economic conditions and healthy corporate earnings have supported their recent strength. The consumption story for key economies in Asia, warranted by structural growth drivers such as rising middle class, continues to present many attractive opportunities.

Hong Kong and Mainland China (H-shares)

  • Hong Kong and China equities rose in October. Notable support came from Southbound inflows and ongoing earnings upgrades.
  • The recently held China’s Party Congress enhanced centralization of power for President Xi jinping to pursue a balanced growth economy by moving steadfast with structural reforms. The Chinese economy is on track to deliver the government target of 6.5% growth, which is still an impressive expansion compared with other major economies.

Japan​​​​​​​

  • Japan’s equity market rose in October, with the market benefiting from the large victory of the ruling coalition the election.
  • We remain optimistic in the near-term Japanese equity market, benefiting from a more stable yen that should boost the performance of exporters. Against this backdrop, we will see robust corporate earnings.

Fixed Income​​​​​​​

  • October was a positive month for bond markets with corporate bonds in general outperforming government bonds. The US Federal Reserve began tapering and the European Central Bank announced it will taper from January 2018
  • The current backdrop of stable global growth, low inflation, and accommodative financial conditions are supportive factors.

Emerging Markets​​​​​​​

  • In October, emerging market equities outperformed developed world peers, boosted by improving earnings. The emerging Asia led the advance. Elsewhere gains in Chile and Hungary were offset by losses in Latin America and Russia.
  • We believe the outlook for earnings growth is well supported by: robust domestic consumption, investment in infrastructure, the solid global economic outlook and a low interest rate environment globally.

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.

China’s Party Congress 2017: Achieving balanced growth economy

China’s Party Congress 2017: Achieving balanced growth economy

The event…

The Chinese Communist Party Congress holds every five years has begun in Beijing on 18th October, which will determine China’s top leadership and set out the top policy agenda for the country for the next five years. This is the most important political event of the year, as the Congress consolidates President Xi’s core leadership into his second term in office.

What we think…
This Congress marks a defining moment in the history of China. It is expected that enhanced centralization of power forms a solid foundation for Xi to pursue a balanced growth economy by steadily moving towards structural reforms. Deleveraging remains high on the agenda. State-owned reform is another focus, and could even see acceleration in coming years. Amidst the bigger agenda of promoting a balanced growth economy, Xi’s government will put in more checks and balances which will ensure stability and growth sustainability for the next decade and beyond. Internationally, China’s solidified political status sets the stage for Xi to build his legacy, notably the Belt & Road initiative, raising the status of China in the world stage.

Deleveraging remains key focus
We believe the Chinese government will remain committed to bringing down leverage. We expect robust momentum in carrying out deleveraging after the Congress. This includes ongoing policy tightening in the financial industry to rein in irrational credit growth, which we have already seen intensified. Year-to-date, China’s regulatory bodies have further clamped down shadow financing via wealth management products (WMP). Encouragingly, we have seen signs of progress. WMP, as a proxy, peaked out in 2016 and modestly contracted in recent periods. Looking ahead, we believe the government will continue with the 3-step approach:

  • Slow the overall pace of leverage
  • Keep overall debt in the non-financial sector relatively stable and reduce the liability ratio for the corporate sector
  • Reduce the overall leverage ratio in the non-financial sector

SOE reform to accelerate
In our view, China’s overall debt problem is centered around the rapid growth of debt in the corporate sector, which has nearly doubled since 2007. It is estimated that two-thirds of corporate debt are related to State Owned Enterprises (SOE). SOE reforms involve many stakeholders and has to go hand-in-hand with deleveraging. A consolidated chain of command for Xi allows scope for a faster and wider scope of execution. The center of SOE reform is to ultimately improve profitability by gaining competitiveness. One of the highlights is to introduce mixed-ownership, by attracting private capital into SOEs. Supply-side reform is another key aspect. We expect more disciplined supply-side control which will eventually improve earnings potential for SOEs.

More checks and balances
Our view is that Xi’s government will continue with the ‘check and balance process’ they have put in place prior to the Party Congress. Over the past year, there has been stepped up efforts on three fronts: 1) slowing down reckless leveraged corporate acquisitions, 2) cutting down excess capacity/leverage, 3) Continuing the anti-corruption campaign. All these initiatives and actions taken are in line with the promoting of a balanced growth economy, which will ensure stability for the next decade and beyond. 

Xi’s legacy and China’s global footprint
Xi will further build his legacy as he transitions to the second term. With further political power amassed domestically, we expect the second term will see the further strengthening of the mega initiatives to expand China’s global footprint. The Belt & Road (B&R) initiative – which Xi initiated in his first term in office – is the world’s largest infrastructure program over the past century, raising China’s influence across three continents: Asia, Europe and Africa. With China at the center of the international stage, the B&R initiative covers 70% of the world population and 75% of the world’s known energy supplies1.

Conclusion:  Strong political leadership to continue
The Party Congress is mainly a political event which will focus on big-picture themes and political ideology. That said, the affirmation of power consolidation for President Xi is supportive of market sentiment in the near term. We expect the government’s policy stance to remain broadly stable after the event, while the market will further await specific policy details. In our view, the Congress marks a defining moment in the history of China. Over the past few years, China has progressed well with the building of a ‘moderately prosperous’ society –  a vision laid down in 2015’s 13th 5-Year Plan. We believe President Xi’s strong political leadership is set for even greater things to come.

1Source: Bloomberg News, as of 11 October 2017

 

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