It was difficult for equity investors not to make money in 2017. Very few equity indices around the world ended up in the red. Of the developed markets, the UK was the worst performing and many are currently cautious on the outlook for the region.
“Even in a world of synchronised growth, the improvement of Europe’s economies stands out,” BMO Global Asset Management’s multi-asset team said this week.
However, they added, there is one notable outlier – the UK. The team goes as far to claim that the UK would be “flirting with recession” had it not been for Europe’s recent pick up.
Brexit negotiations continue to prove difficult and then there’s the prospect of a challenging period of re-adjustment to life outside the single market. While the weak pound boosted the performance of the FTSE 100 after the referendum, it’s done little to enhance the UK’s trading position.
“It has, however, reduced real incomes and squeezed consumption while corporate investment is held back by uncertainty,” they continue.
As a result, BMO GAM’s multi-asset portfolios are underweight UK equities despite being positive in the near-term for risk assets in general. Instead, like many, they are overweight Japanese, European and emerging market equities.
“We expect earnings to grow during 2018,” they explained. “As a result, we are reasonably upbeat on the prospects for equities. A broadening economic and earnings recovery, coupled with some rise in bond yields, are likely to mean that volatility and dispersion finally begin to rise.”
Japan
The team likes Japan for reasons we’ve explored before. Prime Minister Shinzo Abe’s successful calling of a snap election in October strengthened his majority, allowing him to continue pursuing his ambitious economic reforms.
Added to that, the improvement in corporate governance and increased focus on shareholder-friendly management provides scope for better returns going forward.
“We favour higher-quality, growth companies,” they say.
Europe
Politics is a potential area of concern for some, with problems in Catalonia, Italian elections and coalition negotiations in Germany on the horizon. However, there were similar remarks this time last year and Europe sailed through 2017.
“We do not foresee these political issues derailing Europe’s cyclical upturn.” Instead, they see scope for domestic demand expansion and note that European equities are trading at attractive valuations.
Emerging Markets
Emerging market equities were the best-performing assets in 2017. That was largely due to the marked outperformance of Chinese technology stocks like Tencent (00700) and Alibaba (BABA).
The team are underweight Asia-Pacific equities, though. Instead, they favour dominant companies in less-developed areas of the globe.
They note that, while sentiment is likely to be impacted by the path of US rates, the US dollar and commodity prices, there’s been a positive growth in earnings per share so far this year.
