2018 Midyear Global Outlook

06.28.18

Market volatility returned strongly in the first half of 2018 as trade disputes, geopolitical tensions and uncertain global growth rates provided a choppy ride for investors. On the global economic front, the U.S. continued to set the pace as corporate earnings remained strong and business confidence continued to soar. Against that backdrop, the heightened rhetoric and growing quarrels between the U.S. and key trading partners could unsettle the markets in the remainder of the year. What might the second half of 2018 have in store for the markets and investors?

economic growth

U.S. economy sets the pace

The U.S. economy remains a healthy area of strength for global growth despite a slow start to the year and the looming presence of higher market volatility. Overall business optimism remains strong despite concern over the Washington’s position on several issues, most notably the direction of U.S. trade policy. While inflation has picked up slightly, it is still in line with the U.S. Federal Reserve’s (Fed) projection of a 2% target rate. Our view is the combination of tax cuts and stimulus will fuel further growth in the second half of the year, keeping the U.S. economy on pace with our initial 2018 forecast of 2.9%.

IVY VIEW
We maintain our initial U.S. GDP growth forecast of 2.9% for 2018.

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economic growth

Global economy hums along

The global economy remains resilient despite pockets of tepid performance in developed economies and threats of trade disputes. The European Central Bank (ECB) announced it would end its massive bond purchase program later this year, but keep interest rates at record lows through the summer of 2019. Meanwhile, we expect the Bank of Japan to continue its easy monetary policy, lagging other central banks. Our views on China have become more measured as frictions with the U.S. over trade has ratcheted up. These factors have led us to revise our global gross domestic product growth projections to 3.8% for the year.

IVY VIEW
We project global GDP growth at 3.8% in 2018.

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economic growth

U.S. dollar rally looks more durable

After a lackluster start of the year, the U.S. dollar has roared back by midyear. This outperformance was boosted by uninspiring economic performance in several developed economies and the ECB’s decision to rule out an interest rate hike until 2019. We believe this will weigh on the euro in the near term, which could allow the dollar to hold its gains for the balance of the year. Emerging market currencies could continue to lag by the dollar’s appreciation, higher U.S. yields and tighter global liquidity.

IVY VIEW
The U.S. dollar may hold gains through the remainder of the year.

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economic growth

What are the risks?

Because of the relationship between global GDP growth and trade, we believe the biggest risk to the current economic backdrop continues to be global trade tensions. While we believe an all-out trade war between the U.S. and key trade partners can be avoided, global economic growth could be stunted if the U.S. imposes additional tariffs on more goods and countries. Citing robust growth and a tightening labor market, the Fed raised interest rates in June, putting the key federal funds rate at a target range of 1.75 – 2.0%. We anticipate the Fed will make two more rate hikes in 2018. On the geopolitical front, the U.S. and North Korea have gone from trading insults and saber rattling to a face-to-face summit. While it’s unclear if the Kim regime has altered its nuclear aspirations, we think the bilateral meeting is a positive step toward improved relations and the markets will view it favorably.

IVY VIEW
Trade is the greatest threat to disrupt the global economy.

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economic growth

Key sectors to watch

Technology continues to be the main catalyst of market activity, while rising oil prices fueled a rally in energy sector. Financials are closely connected to the prevailing winds of interest rates, which may explain the sector’s modest performance to date. The rising cost for shipping and a tight trucking market has opened opportunities in transportation, especially in the intermodal and rail spaces. Lastly, health care remains a defensive investment in our view as health care reform remains a back-burner issue in Washington.

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