Looking Toward 2018

 In Market and Investment Insights

As we approach 2018, we should applaud the equity markets for the wealth created, yawn at the “apparent” boring script followed by the fixed income markets with global rates ending the year nearly where they started – but end-points only tell a small part of the story – and congratulate the commodity market for delivering its first positive annual return in six years.

So what is in store for 2018? Our proprietary option-based signals of upside and downside indicate that the start of the year will be a continuation of last year at the macro-level with equities leading the pack and fixed income lagging. We see Japan equities as the most attractive developed region further supported by a weaker YEN and weaker European equities further weighed down by a stronger EUR. We see China and Hong Kong continuing to lead emerging market performance over their Latin American counterparts. Within China, we see A-shares more attractive than H-shares.

Alongside these themes of top-level “continuation,” however, we see underneath the surface signs of “change.” Several key trends that characterized the markets last year, if not longer, now appear fragile. Namely, developed equity markets appear to be positioned to outperform EM markets and yield curves might steepen and not flatten, along with initial signs turning towards small caps and away from large caps and towards value and away from growth.

Although at the macro level, the signals indicate a continuation of the measured approach to quantitative tightening by the global central bankers, at a lower micro level “winds of change” may well ring in 2018.

To learn more about where our experts see notable trends and opportunities for the year ahead, read our 2018 Market GPS Outlook.

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Options prices can provide efficient estimates of the market’s assessment of whether asset prices are more likely to rise or fall over the near term by filtering out the noise of the broad market and focusing on what is expected to be material. The team relies on the option markets to provide insights into specific equity, fixed income and commodity markets from which they infer expected tail gains (ETG) and expected tail losses (ETL) for each asset class. The ratio of these two (ETG/ETL) provides a signal about the risk-adjusted attractiveness of the asset class.