Don’t let this year’s market strength fool you. Unigestion, in its 2018 outlook summary, is calling for challenges in the coming year, including inflation pushing higher and further tightening of the monetary policy around the globe.

As a result, the asset management firm plans to do the following.

  1. Reduce exposure to duration-sensitive assets, in light of central bank tightening.
  2. Maintain or increase exposure to equities and commodities.
  3. Generate “non-directional returns” through relative value strategies.

The firm also forecasts the fallback of the so-called “Goldilocks economy” that has persisted in 2017, which led to strong returns for many asset classes. Through the last 12 months, markets benefited from “low inflation, synchronized growth, healthy corporate earnings and a continuation of loose monetary policy from central banks,” says Unigestion.

Top-performing asset classes for 2017 included both developed and emerging market equities, and precious metals. Energy and investment-grade credit did poorly.

Looking forward, the news isn’t all bad. Despite inflation-related hurdles, Unigestion expects 2018 will bring growth that is “solid and synchronized,” which will allow “world GDP to grow above potential for a second consecutive year,” the firm says. “According to International Monetary Fund forecasts, the output gap for advanced economies will rise from -0.1% in 2017 to 0.3% in 2018.”

Two things to watch are correlation and volatility, which could “change dramatically going forward” as the Fed continues to hike.

Read the full report.

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