We believe 2018 will mark the transition from a full-speed reflationary phase, directional and bullish for risk assets (both credit and equities), towards a late phase of the financial market cycle. This could have far-reaching consequences for investors.
First of all, in terms of opportunities remaining in the market. In our view, in a world of stretched valuations across the board and interest rates trending higher, these opportunities will lie less in the directional space and more in relative value stories at the country, sector and/or security level, with rotation of markets, themes and styles taking place during the year. Based on a cross-asset perspective, this rotation will favour equities over credit, in our view: in equities, Europe and Japan and, selectively, some emerging markets (countries in the earlier stage of the financial cycle), value and themes point towards inflation-related stocks and companies which may benefit from higher interest rates; in fixed income, a flexible approach to duration, yield curves and currencies (due to different speeds in removing monetary accommodation, i.e., higher in the US than in the Eurozone and Japan) and across the full credit spectrum (liquid and illiquid).