- In the US, signs of real wage growth, an upturn in capital spending, and resulting improvements in productivity are all potential positives, while passage of tax reform could add another year or two to the current expansion.
- Macquarie sees greater overall potential in developed equity markets outside the US, such as in Europe where fundamentals and valuations are attractive - for example in France, where reforms are driving real economic change.
- Australian equities are facing some headwinds, from energy costs to threats of online retailing, but China's influence remains positive.
- In Asian equity markets, China's evolving growth and innovation goals remain a key catalyst while Japan's structural reforms are driving real gross domestic product (GDP) growth and equity market prospects remain promising.
- Global risks include excessive indebtedness in the government and corporate sectors; sub-par economic growth; political dysfunction; unintended central bank effects; and rising geopolitical conflicts.
"The Federal Reserve has raised rates a few times and signalled the start of unwinding its balance sheet, while other Central Banks continued with Quantitative Easing and negative interest rate settings, notably Europe and Japan," said Brett Lewthwaite, global co-head of fixed income for Macquarie Investment Management. "While there has been a subtle shift by Central Banks, when I look around the world collectively, things haven't changed that much from where we were a year ago. Central Banks continue to be a primary influence in fixed income markets. And if something flares up in 2018 or 2019 that might destabilize economies, it still seems likely that Central Banks would step in to contain the event."Key expectations:
- While it's reasonable to expect positive returns in 2018, Macquarie sees a year when bonds will likely move forward in muddling fashion.
- Although growth appears healthy, Macquarie forecasts rates to remain range-bound, with the 10-year US Treasury rate likely to stay between 2.0% and 2.6%.
- Macquarie believes structural forces limiting inflation should continue to exert their current power.
- Policy makers have narrow options for next steps and their decisions are likely to be predictable.
- Investors are likely to continue to chase yield.
Duration measures a bond's sensitivity to interest rates by indicating the approximate percentage of change in a bond or bond fund's price given a 1% change in interest rates.The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the US stock market.