Investment Outlook 1Q18: Steady as She Goes
It was an eventful start to February for global stock markets – and here with some pointers for the first quarter and to remind us of why a long-term view is important, is Kasim Zafar, Portfolio Manager at EQ Investors. Equity markets had a very strong start to the year, continuing their trend from 2017 […]
It was an eventful start to February for global stock markets – and here with some pointers for the first quarter and to remind us of why a long-term view is important, is Kasim Zafar, Portfolio Manager at EQ Investors.
Equity markets had a very strong start to the year, continuing their trend from 2017 and supported by robust economic and earnings growth. For the first time since September 2011, all geographic regions are achieving sustained positive earnings growth – and we see this global ‘synchronicity’ as generally being a good thing.
However, with the S&P 500 (as an example) up 7% year to date in mid-January, the magnitude of this momentum was difficult to justify. Subsequently, we have seen some violent moves in markets. In our view this was a long overdue market correction and see volatility as a healthy sign investors are taking account of the risks inherent in markets.
So our current outlook and base case remain unchanged: global growth has improved markedly and inflation expectations in Europe and the US are increasing. This has led to more hawkish rhetoric from central banks – including plans to increase interest rates and rein back on quantitative easing – but in the grand scheme of things they remain relatively accommodative.
Recently, we have marginally increased our developed equity exposure, and remain excited by developments in Japan & Europe where we are overweight our long term benchmarks. Political stability is set to continue in Japan following the re-election of Prime Minister Shinzo Abe. This likely means business as usual and a continuation of structural reforms feeding through into strong corporate earnings and wage growth.
And European growth prospects are now among the most exciting globally, after years lagging other developed markets. Europe is likely to benefit in a similar vein to Asia from ongoing synchronised global growth and its economic recovery is much less mature than that in the UK or the US – with low inflation suggesting that, in spite of strong growth, the economy is some way from overheating.
We still hold a slightly negative view on long duration bonds as inflation may rise in the short term – negatively impacting values. With tight credit spreads we see little value in either investment grade or high yield bonds as an asset class either. So in fixed income we continue to invest in flexible strategies that can take advantage of specific opportunities as they arise.
One impact of globalisation is that corporate revenues and earnings are increasingly spread across the globe. This has a big impact on geographic equity allocation, which has been the basis for traditional asset allocation. In short, it is far less relevant than it once was. As an example, around 80% of revenues generated by FTSE 100 companies (i.e. listed in the UK) come from overseas.
Because of this, and drawing the success of this approach with our Positive Impact Portfolios, the research team are increasingly finding interesting investment ideas from funds that invest in global themes rather than specific geographies.
Healthcare, artificial intelligence and the millennial generation are three examples and you can expect more of this ‘thematic thinking’ in our outlook going forward.