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Global Financial Forecast 2017 – 2024 (Fiera Capital)

Fiera Capital Global Financial Forecast 2017-2024, November 2017

  • Following the 2008 credit crisis, financial markets have provided robust returns for both fixed income and equity investors
  • Many stock markets breached record levels in 2017, while long-term interest rates reached all-time lows – with many countries even operating with negative rates
  • Over the last several years, both the economy and financial markets have been driven by extraordinary actions from central banks, a thirst for yield, falling productivity, and a prolonged expansion characterized by very low inflation
  • As a result, valuations have improved across the traditional asset classes. However, this landscape was unusual in nature and is unlikely to be repeated in the next 7 years
  • We are approaching a turning point where the key drivers of economic growth, inflation, liquidity, and valuation are expected to change – with varying implications for financial markets going forward

Key Economic Drivers: Next 7 Years

  • Business cycle (a return to normalcy)
    • Going back to the 1980s, recessions have only occurred once per decade
    • While the current business cycle is one of the longest on record, we are approaching its later stages
    • That being said, we are unlikely to see a recession in the next few years as central banks remain accommodative overall even as growth conditions improve
    • We do expect a recession and a corresponding recovery to take place in the back half of our 7 year forecast horizon
  • Central banks (less influence)
    • Since the credit crisis, central banks have been a dominant force in the financial marketplace – expanding their balance sheets at an unprecedented rate and cutting interest rates to historic lows
    • As we approach the final innings of this economic cycle, a return to normalcy suggests less involvement and interference from central banks worldwide
  • Demographics (aging populations)
    • Global population is expected to reach 10 billion in 2050 (from 7 billion today), while the increase in average age is expected to reduce potential growth and send yield-starved investors flocking towards income-oriented investments
  • Politics (political uncertainty)
    • We have witnessed a trend towards protectionism and more nationalistic policies, with a push to reduce government involvement in people’s daily lives
    • Signs of political angst tend to spur periodic episodes of market volatility, with associated implications for both the economy and accordingly, financial markets
  • Productivity (technological advancements)
    • Economic landscape has been characterized by excess capacity and low levels of investment, both of which have thwarted productivity
    • We anticipate that increased technological advances will see a recovery in productivity, while reduced regulation, increased infrastructure, and lower taxes should also lend support

Financial Market Impact

  • Taken together, we expect more traditional economic patterns to re-emerge after several years in stagnation-mode, with the return to a more normal, cyclical environment that includes modestly improving growth, rising inflation, stabilizing liquidity, and decreasing valuations
  • Expect inflation to reaccelerate as the economic recovery translates into an outright and self-sustaining expansion, with US growth reaccelerating towards its historical average of 3%
  • As central bank support will no longer be required, liquidity will be reduced progressively, while valuations are expected to revert back to more normal levels
  • In this reflationary environment, nominal interest rates will move higher with the overnight rate in the US set to peak at 4%
  • Meanwhile, combination of higher discount rates and stronger growth suggest that P/E ratios will moderate gradually towards their historic levels around 15x earnings
  • Expect equity prices to progressively move higher over the time horizon but expected returns will be lower than previous years
  • This reinforces the need for non-traditional assets in the portfolio setting, which are expected to offer an increasingly compelling risk-reward proposition versus their traditional counterparts over the next 7 years

Matrix of Expected Returns

matrix

Image Source: Fiera Capital

 

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