Caroline Miller: 2018 Will See Outperformance Shift Back to US

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The following is a summary of our recent FS Insider podcast, BCA’s Caroline Miller: US Likely to Surprise Next Year, which can be accessed on our site here or on iTunes here.

Global growth is still in a synchronized upswing and confidence by both consumers and businesses is the strongest it has been in years. Are investors headed for a big surprise in 2018?

Caroline Miller, BCA Research Global Stategist, believes there will be as the US economy sees better than expected growth starting next year. She recently spoke with FS Insider about BCA's outlook, including both opportunities and risks for investors.

Global Synchronized Upswing Still Underway

Business is booming, and BCA’s data says that global growth is liable to remain firm heading into next year.

Though their 40-country leading economic indicator has moderated slightly from its 2017 highs, it is still pointing to above-trend growth.

bca global growth
Source: BCA Research - 2018 Global Macro Outlook

In terms of the composition of global growth, Caroline says to look for a possible rotation from Europe to the US in 2018.

“What’s likely to shift next year is that 2017 was definitely the year of the rebirth of Europe,” she said. “Our view at BCA is that, going into next year, we’ll see reasonably firm global growth, but a rotation back to the possibility of the US surprising to the upside.”

BCA’s Recession Outlook

Looking at a variety of leading indicators, Miller said the risk of an imminent recession in the US is quite low.

Three indicators in particular she cited as evidence are the Yield Curve, the Conference Board US Leading Economic Indicator, and US Cyclical Spending (see below).

bca business cycle
Source: BCA Research - 2018 Global Macro Outlook

Given the data trends BCA is watching, Miller explained to listeners that the odds for a recession in the world's largest economy are low for 2018 but that may change the following year.

Currently, their base case is for the US economy to “hit traffic leading to a recession later in 2019,” citing rising corporate leverage, wage pressures, and other factors.

Risks and Opportunities

The risks are greatest coming from China and emerging markets, Miller believed.

At the margin, tighter monetary conditions in China are likely to slow the rate of credit growth, which is an important leading indicator for fixed asset investment in China. Fixed asset investment drives import demand for many of China’s suppliers, which is basically the rest of the EM universe.

In terms of opportunities, there’s still the chance to benefit from continued performance of financials, she believed, with banks in the Euro area likely to benefit from a steepening yield curve.

The performance of energy relative to the broad equity market has been very poor, she added, indicating a possible opportunity there as well for investors should oil prices remain firm.

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