Executive summary

  • During the fourth quarter, the state of the business cycle as well as its outlook improved but a mild contraction phase remains in sight. Global economic growth is strong and broad-based, while unem- ployment levels are low and declining. Investors remain optimistic as re ected by high business and consumer con dence, rallying equity markets and subdued volatilities.
  • Solid growth, low in ationary pressures, the search-for-yield and the lack of a foreseeable catalysts for a market correction, all com- bined act as a powerful, optimistic and con dent force resulting in a positive outlook for the short term.
  • However, the fundamentals point to a more cautious medium term outlook. Business cycle dynamics teach us that going forward we should expect returns to decrease as cyclical measures normalize. Additionally, valuations levels are high and central banks have em- barked on their slow path of normalizing monetary policy. Together, these effects lead to an outlook with lower expected returns for the medium term.
  • But just as any aspect of our outlook, this more sober medium out- look is highly uncertain. For example, we see a probability of 1 in 3 that the business cycle will have entered a contraction phase al- ready by the end of 2018. But there is also a probability of 1 in 6 that the business cycle has not yet turned negative as late as by the end of 2020.

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