Quarterly Asset Class Return Forecasts: Q1 - 2018

The robust global economic growth experienced in 2017 is expected to continue into 2018, albeit with some notable exceptions such as UK. Such growth is to be reflected in ever higher equity price levels and thus expected to become costlier with respect to the most recent valuations.

Despite the rosy economic prospects, inflation in major economies is to remain subdued below the respective targets due to structural factors in the short term. However, central banks are looking to stay a step ahead of inflationary pressures and are attempting or in the midst of exiting QE and normalize interest rates. With the Fed leading the cautious charge with multiple rate hikes in 2018 in absence of any significant economic or geopolitical event, ECB is expected to follow suit shortly afterwards.

As a result of the rate normalisation process, sovereign bonds across developed markets are expected to have negative to low returns, in most cases going below that of the cash over the short to medium time horizon. Historically tight spreads across geographic and credit spectrum together with prospects of rising rates will depress short-term returns for the credit products.

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