Market Volatility No Match for Strong Fundamentals
Despite the increase in market volatility over the past several days, we believe fundamentals remain strong and maintain our positive economic outlook.
- We are witnessing the most synchronized global recovery since the 1960s.
- The Organisation for Economic Co-operation and Development’s (OECD) leading indicator suggests strong earnings growth during the coming quarters.
- Global manufacturing and service Purchasing Managers Indexes (PMIs) have been rising for over a year.
- In the U.S., earnings growth is being turbo-charged by the recovery and the recent tax changes.
- Central bankers have successfully staved off deflation, while inflation remains below 2% in the G-7 and has declined markedly in emerging markets.
- There is some upward pressure in the U.S. due to labor markets, but it is partially offset by technology-driven deflation.
- Our base case is that this tug-of-war keeps inflation controlled.
- We expect slow, gradual normalization of monetary policy that should be taken in stride by the markets.
- Quantitative easing (QE) is done in the U.S. and U.K., and tapering has started in Europe.
- There will be a headwind to further valuation expansion, but that does not mean valuations have to significantly compress.
- Quantitative tightening introduces more uncertainty, which will increase volatility.
- Volatility creates better opportunities for active managers.
- Stock correlations have fallen, which is also good for active managers.
- The opportunities for stock pickers should hold during 2018.
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The Group of Seven (G-7) is a forum of the world’s seven most industrialized economies. The G-6 was formed in 1975 and consisted of France, Germany, Italy, Japan, the United States, and the United Kingdom; Canada was invited to join the group in 1976. G-7 officials meet to discuss international economic and monetary issues.
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