First Abu Dhabi Bank (FAB) has published its inaugural Global Investment Outlook report for 2018, ‘Going from Strength to Strength.’ The report examines the current global economic and investment environment, with contributions from experts across FAB.
According to the report, FAB is expecting world growth forecasts to be revised upwards, to 4.0% for 2018, led initially by the developed nations. The ‘normalization’ of interest rates should continue to be US-led, with Fed funds probably going to 3% by early 2020 (i.e. approximately 1% above inflation). That rate target should not hurt equities, the asset class which the bank favours for 2018. The team is anticipating higher equity price volatility, and for technology stocks to outperform over the year as a whole.
The FAB investment team expects earnings estimate revisions to generally be very positive during the year, helping to moderate many valuations. Their largest proportionate overweight position remains Asia-Pacific (ex-Japan) equities.
The team is recommending underweighting Developed Market Government bonds, anticipating three US Federal Reserve rate hikes in 2018, and at least two in 2019. In terms of foreign exchange markets, the bank is expecting US interest rate increases to lead to some firmness in the dollar relative to other major currencies. In crude oil, the price of Brent should be capped at around $70/barrel in 2018, with $50 the expected low.
Alain Marckus, Head of Investment Strategy, Products & Services – Wealth and Private Banking, said: "New all-time highs in the major equity indices, led by the US, is what we have been positioned for, and this is the backbone of our ‘risk-on’ call, driven by world growth, which we firmly expect to be revised upwards during the year, and reforms in the US, China, and the Eurozone.
We are particularly bullish about the Asia-Pacific region, and in no way share the conventional view that China will fail in its economic transformation. In terms of equity sectors, we reiterate our enthusiasm for technology stocks, although with higher volatility expected. Fundamentally, our enthusiasm is undiminished in this very important sector – underpinned by the numerous growth opportunities and excellent free cash flow at major companies."
