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Our Investment Outlook for 2018

For investors, the beginning of a new year is a great time to plan for what the next twelve months may hold. What do I need to know about the markets? And what should I consider doing about it?

The BlackRock Investment Institute has identified three key themes for the year.

Economic Expansion Continues, but with Less Upside to Lift Markets

What to Know: We believe today’s markets are underestimating the durability of the current expansion, which has room to run into 2018 and beyond. That said, there is likely less scope for upside growth surprises.

What to Consider: We see emerging market (EM) stocks again potentially outperforming developed markets in 2018 as profits rise and more investors return to the asset class. EM may be hard-pressed to repeat their strong earnings, but steady global growth, robust trade and commodity price stability should leave them well positioned. Japanese stocks may have a longer runway than other developed markets.

Inflation Stepping Back into the Picture

What to Know: Inflation is making a modest comeback: we see U.S. core inflation rising and, as a result, potentially higher U.S. bond yields ahead. Tax cuts could boost near-term growth and quicken the Fed’s pace to raise rates.

What to Consider: With the potential for higher U.S. inflation and bond yields ahead, we prefer inflation-protected bonds over nominal bonds.

Reduced Reward for Risk

What to Know: 2017 was a near-perfect year for risk assets, but the road ahead looks more challenging. Why? Asset prices have risen across the board, market volatility has stayed very low and many perceived risks have not materialized. This makes markets more vulnerable to temporary selloffs sparked by potential bubbling over of geopolitical risks. We expect rewards for taking risk to be more muted across the board in 2018 but believe investors could still get compensation for taking them.

What to Consider: We prefer equities over bonds. The momentum “factor,” which aims to capitalize on existing trends in the market, should continue to do well; we also like value, home to cheaper companies across sectors.

As always, we urge investors to take a hard look at not just their returns, but also their investment expenses. With the markets likely moving into a lower-return environment, costs can play a crucial role in total portfolio performance.