We remain constructive

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 Eurozoneperiphery, 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

	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-marketsovereigns	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