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We remain constructive

Our December 2018 targets, slightly revised

Despite recent market turbulence we reiterate our key themes, albeit with minor adjustments

Economic outlook:

We see solid economic momentum in both Europe and the United States, but few signs as yet of inflation sharply accelerating. For now, no significant impact on real economic activity from financial-market events.

Monetary policy:

We expect three rate hikes by the U.S. Federal Reserve by the end of 2018. Towards the end of the year, attention is likely to shift to the European Central Bank (ECB) following the Fed's path towards normalization.

Currencies:

We believe that the recent dollar weakness has been overdone. Yield differentials, high net long euro positions and technical factors should leave some scope for a dollar rebound. For December 2018, we are sticking to our call of $1.15 per euro.

Fixed income:

  • We are raising our rates forecasts for U.S. Treasuries (2-, 10- and 30-year) and German Bunds (2- and 10-year).

  • For the Eurozone periphery, we expect a tightening of spreads (vs. Bunds) for Italy to 120 bps, and are reducing our spread forecast for Spain to 90 bps (roughly where markets are currently trading).

  • No changes to other spread targets.

Equities:

  • We are sticking to our view that there is significant upside from current levels.

  • All our year-end targets for developed markets remain intact. Within developed markets this suggests larger upside outside the United States.

  • Within emerging markets, we are actually raising our targets for Latin America.

Fixed income

  Current* Dec 2018F

United States

U.S. Treasuries (10-year)

2.85%

3.00%

U.S. municipal bonds

86.1%

85%

U.S. investment-grade corporates

88 bp

80 bp

U.S. high-yield corporates

369 bp

350 bp

Securitized: mortgage-backed securities1

72 bp

100 bp

Europe

German Bunds (10-year)

0.75%

1.00%

UK Gilts (10-year)

1.57%

1.40%

Euro investment-grade corporates2

84 bp

75 bp

Euro high-yield corporates2

291 bp

260 bp

Securitized: covered bonds

36 bp

65 bp

Italy (10-year)2

130 bp

120 bp

Asia-Pacific

Japanese government bonds (10-year)

0.07%

0.1%

Asia credit

219 bp

210 bp

Global

Emerging-market sovereigns

287 bp

285 bp

Emerging-market credit

282 bp

270 bp

* Source: Bloomberg Finance L.P. as of 2/9/18

F refers to our forecasts as of 2/12/18

1 Current-coupon spread vs. 7-year U.S. Treasuries

2 Spread over German Bunds

bp = basis points

For sovereign bonds, denotes rising yields, unchanged yields and falling yields. For corporates, securitized/specialties and emerging-market bonds, the arrows depict the option-adjusted spread over U.S. Treasuries: depicts a rising spread, a sideways trend and a falling spread.

The arrows’ colors illustrate the return opportunities for long-only investors. Positive return potential for long-only investors. Limited return opportunity as well as downside risk. Negative return potential for long-only investors.

Currencies

  Currencies Current* Dec 2018F

EUR vs. USD

1.23

1.15

USD vs. JPY

109

115

EUR vs. GBP

0.89

0.88

GBP vs. USD

1.38

1.3

USD vs. CNY

6.3

6.8

* Source: Bloomberg Finance L.P. as of 2/9/18

F refers to our forecasts as of 2/12/18

Equities

  Equity markets (index value in points) Current* Dec 2018F

United States (S&P 500)

2,620

2,750

Europe (Stoxx Europe 600)

369

405

Eurozone (Euro Stoxx 50)

3,326

3,780

Germany (Dax)1

12,107

14,100

United Kingdom (FTSE 100)

7,092

7,500

Switzerland (Swiss Market Index)

8,682

9,450

Japan (MSCI Japan Index)

1,030

1,120

MSCI Emerging Markets Index (USD)

1,143

1,210

MSCI AC Asia ex Japan Index (USD)

697

760

MSCI EM Latin America Index (USD)

2,952

3,150

* Sources: Bloomberg Finance L.P. as of 2/9/18

F refers to our forecasts as of 2/12/18

1 Total-return index (includes dividends)

For currencies and equities, the arrows signal whether we expect to see an upward trend , a sideways trend or a downward trend .

The arrows’ colors illustrate the return opportunities for long-only investors. Positive return potential for long-only investors. Limited return opportunity as well as downside risk. Negative return potential for long-only investors

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