2017 has been a strong year for equity markets as we have seen a level of stability for the first time since the global financial crisis. The global economy has been in fairly good health and we have seen a period of synchronised global growth. However, markets have risen strongly in a combination of PE expansion and earnings growth, so markets are expensive.
In 2018 we expect the phase of synchronised global growth to continue and corporate earnings to continue to grow. However equity markets are unlikely to have a repeat of 2017 and investors need to look towards areas which offer the best combination of value and growth.
The outlook for Japan has been improving throughout 2017 and looks set to continue into 2018. The area looks attractive in spite of a recent strong run. Firstly valuations continue to look cheap compared to the developed markets of the US and UK. In fact valuations still look attractive relative to the country’s own history. This is because, although Japanese stock markets have risen, corporate earnings have also been rising offsetting the rise in value of the Topix - so the P/E of markets hasn’t changed much. The economic climate also remains supportive of further stock market gains. QE and record low interest rates continue in Japan, whilst Prime Minister Shinzo Abe continues to drive through structural change – his third arrow of reform which is beginning to have an effect. Unemployment is now down to 3 per cent and real wages are rising for the first time since 2010. The jobs markets is booming as well with job to applicant ratio rising with now around 1.5 jobs for every application.
Man GLG Japan Core Alpha - Stephen Harker is a contrarian investor, actively looking for companies out of favour with investors. He uses valuation measures including Price to Book, Dividend Yield and Price Earnings ratio to identify such stocks. He selects companies with strong fundamentals where he believes there is the opportunity for a turnaround. The portfolio is currently positioned to benefit from a stronger economy in Japan with exposure to cyclicals and financials.
Baillie Gifford Japanese - The focus of this fund is very much long term growth which can result in short term underperformance and volatility in the fund. The managers Matthew Brett, Donald Farquharson and Sarah Whitney look at a company’s fundamentals, in particular a sustainable high return on capital. They are looking for companies with steady growth, special situations, cyclical stocks and secular themes. The fund has exposure to cyclical industrials and car manufacturers and technology.
With a more stable political landscape in 2018 and a much improved economic outlook for 2018 the European market continues to offer value. Business and consumer confidence has been improving across the region and corporate earnings put in a strong single digit growth in 2017 and is expected to repeat that this year. Europe is much earlier in the economic cycle than the UK and the US and therefore the region is likely to see improvement for further GDP growth and improvements in consumer spending and corporate profits. The recovery and expansion phases of the economic cycle tend to be the phases were there is the largest movement in terms of economic growth.
In spite of this improved outlook investors have remained fairly cautious preferring to wait for the evidence before revaluing stocks. So, as with Japan, although markets rose they only did so to reflect the rise in earnings – valuations didn’t go up. Over the longer term we continue to favour mid to smaller companies which should benefit from the domestic recovery in Europe.
Schroder European Alpha Income - Manager James Sym runs this fund on a business cycle approach taking into account macroeconomic climate and market sentiment when picking individual stocks. There is a tendency towards value stocks but this will vary with where Sym believes we are in the economic cycle. The cyclical stock picking strategy should benefit investors most in rising market and is designed to take the most advantage of the European recovery.
Blackrock European Dynamic - Manager Alistair Hibbert uses a flexible but defensive style, allowing him to adapt the portfolio to changing market conditions. Hibbert employs a rigorous, disciplined fundamental research process combined with strong economic awareness and sophisticated risk management tools to produce consistent market beating returns over time. Hibbert runs an unconstrained fund with a focus on companies which have higher potential earnings growth than the market over the medium and long term. The flexible approach means the fund will change style from growth and value depending on where we are in the economic cycle.
China looks set to lead emerging markets as the underlying economic data is supportive of strong single digit growth and valuations remain attractive. Whilst debt in the country continues to rise this is currently offset by the foreign reserves and continued economic growth. China is continuing to make progress from a global exporter to domestic consumer and there has been a shift from ‘Made in China’ to ‘Innovated in China’ as the country has emerged as a global leader in technology. We believe emerging markets closest to China will benefit from a halo effect so prefer Asian Emerging Markets. India is also worth a mention as structural reform there should begin to work through and show some benefits to the economy over the coming years.
RWC Global Emerging Markets - The fund run by John Malloy is actively managed. At the moment they favour China on valuation grounds, but the fund can invest anywhere in emerging markets and the team are flexible to act quickly if the outlook for China should change. This fund will be well positioned to benefit from the success of China or avoid the region if outlook sours.
Fidelity Emerging Markets - The fund invests in companies with superior business models that demonstrate strong and sustainable profitability and a consistent track record over time. Manager, Nick Price, is looking for confirmation of quality through superior and sustainable return on assets, strong and unleveraged balance sheets, track record and valuation. Price prefers self-funding businesses which treat shareholders fairly. He is also interested in companies with long term growth potential where reinvestment in that growth delivers a high rate of return. Holdings are sized based on these aspects and the portfolio manager’s view.
Adrian Lowcock is investment director at Architas.Keep up to date with all the latest personal finance news and investment tips by signing up to our newsletter. Email subscribers will also receive a free print copy of Money Observer magazine.
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