Until and unless we see a change in momentum in one of three macro factors (growth, inflation and financial conditions), fixed income markets should remain well-supported
The current investing environment seems daunting. Markets have had a strong couple of years and valuations are tight. At the same time, risks abound. Geopolitical risks including North Korea, terrorism, Brexit and unpredictable politics in Europe and the US make for an uncomfortable investing environment. In such uncertain times, it is important to use an investing framework to help manage through the many risks in the markets, to remind us of the markets’ key driving forces and to help measure the impact of events or potential risks.
In 2018, we anticipate that central banks will begin to tighten financial conditions, but they will likely be cautious and the pace should be slow enough that overall financial conditions should remain easy. This view on global growth, inflation and financial conditions should be supportive of all risky assets in 2018, including credit and equities. Until and unless we see a change in momentum in one of these three macro factors, fixed income markets should remain well-supported.
We also use this framework to look at potential risks and actual political events. The “newsworthiness” of an event is not as important for markets as its impact on these three factors, in our view. We undoubtedly will continue to get some market volatility around political events in 2018, but we believe this volatility should mostly be short-lived, so long as it does not affect growth, inflation or financial conditions.
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