This article is part of Morningstar’s Guide to Investing Ideas for 2015, our comprehensive round-up of where the most promising stocks, funds and markets can be found this year.
Emma Wall: Hello and welcome to the Morningstar series 'Ask the Expert'. I'm Emma Wall and here with me today is Jeremy Beckwith, head of Research for Morningstar.
Jeremy Beckwith: Hello.
Wall: Hello Jeremy.
Beckwith: Hi.
Wall: So in New Year, thought we talk about what investors can expect from 2015. Looking then at the domestic stock market; the U.K. plateaued pretty much last year. What do the next 12 months hold?
Beckwith: So the biggest thing that next 12 months hold is General Election which is almost impossible to decide what's going to happen. And my best guess would be that we get very uncertain outcome and neither Conservatives nor Labour are able to get a majority even with Liberal Democrats which leaves U.K. politics in a bit of a mess. And means possibly a second General Election during the year.
So that’s probably negative for company's investment plans. And there will be lot of political uncertainty. So I think it would tend just to hold back confidence in the U.K. economy a little bit. Probably more importantly it would mean sterling is likely to be weak and that’s actually pretty good news for the larger companies in the FTSE.
So actually I would say we make some money in U.K. equities this year, not a huge amount but I would hope to be somewhere around 7,000 by the end of the year which is 6%, 7% up from where we are today.
Wall: And that’s because 70% of the FTSE 100 or 70% of the revenues of the FTSE 100 come from overseas. So weak sterling is a positive.
Beckwith: That’s right and almost half the dividends as well. So the dividend base will be growing quite nicely in the U.K.
Wall: So if you are not gung-ho about the U.K. but sort of quietly positive. What are you gung-ho about?
Beckwith: The market I like most of all is Japan. It's a market where corporate earnings are almost certainly being underestimated by the analysts, because the weakness of the yen last year has not yet flowed through into higher earnings estimates and it’s a market where the policy makers are determined to try and create some sort of inflation and they are printing money. There is literally no tomorrow. And they seem determine to continue to do so until something happens in Japan, Japan gets more inflation and that’s got to be good for corporate earnings in Japan. And Japanese valuations are amongst the lowest in the world of the developed markets anyway.
Wall: Japan got a new Prime Minister.
Beckwith: Well, the same one again.
Wall: But as in last year stock markets went up and there was initial rally and then they seem to plateau because the ‘third arrow’ seemed to miss. Is all of this just noise, should we be worried about that or as you say people are underestimating the stock market?
Beckwith: Well, he went for a quick snap election in December so he's got reelected again and that probably gives him a mandate to take more action with regard to the third arrow, the structural reforms and if we do then that's more good news I think for the Japanese market. But I don’t think you need to expect very much of that or to be confident that Japanese earnings expectations will be exceeded.
Wall: And what then about perhaps a market you are not so keen on?
Beckwith: Market I am not keen on is America. Very, very high valuations on almost every grounds wherever you look – on long term earnings on price to sales, even dividend yields are pretty uninspiring. And you have a market where most companies are stretching their profit and loss statements to show the highest possible profits. And so GAAP earnings, generally accepted accounting principle earnings are much, much lower than the earnings they actually publish. And so the quality of earnings in America I think is not new as good as they appear to be and valuations are very high, you just need a little bit of bad news about the U.S. economy and I think you could see a bit of tumble in the U.S. equity market.
Wall: Is that something that’s unique to the larger stocks or is that across the board, because we've seen such a significant rally over the last four years from the U.S. is there anything left, is there any value left at all or is everything is just too expensive?
Beckwith: There is not lot of value left in the U.S. market. Smaller companies got more expensive last year and underperforming last year than larger ones. But both large and small companies are very expensive in the U.S.
Wall: Jeremy, thank you very much.
Beckwith: Pleasure.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
