TOKYO: Market confidence is supported by a reasonably strong cyclical upswing in world GDP growth. This is being translated into corporate earnings growth, [and is supported] by a belief that central banks will not significantly tighten monetary policy unless justified by growth and inflation data, and by the U.S. corporate tax cuts announced in December which will boost Wall Street corporate earnings,” he says. To beat inflation, Elliot suggests that investors “support risk assets,” including equities and non-core government bonds. Taking a long-term, multi-asset approach that involves regular rebalancing may also work, he adds. For the coming year, both Japanese and emerging market stock markets may “offer most value; the U.S. less so,” he says. Why? Japan grew in Q3 2017 and “continues to benefit from a weak yen and the upturn in global demand for its exports,” while emerging market stocks “continue to look undervalued relative to their developed market peers on most valuation measures, despite their outperformance in 2017.” In contrast, Elliot says the U.S. market “is the most overvalued.” Still, “U.S. corporate earnings growth will remain strong, limiting any pull-back in share prices,” he says. At the same time, the weak dollar will boost export earnings, consumer confidence remains supportive, and tax cuts may act as a net benefit.
One asset class to be cautious on is fixed income, Elliot says. Commentators are “generally nervous of bonds, fearing that an inflation problem is around the corner.