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Alpha Atlas: where in the world to find 2018 outperformance?

How investors are approaching different regions in the New Year

The Donald Trump effect, inflation and central bank policy are some of the common themes on the radar for investors looking ahead to 2018.

Despite a broadly positive mood about the global economy, concerns about the duration of the equity bull-run continue, meaning regional allocations are set to be crucial to performance.

This is how investors are approaching different regions in the New Year.

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The Donald Trump effect, inflation and central bank policy are some of the common themes on the radar for investors looking ahead to 2018.

Despite a broadly positive mood about the global economy, concerns about the duration of the equity bull-run continue, meaning regional allocations are set to be crucial to performance.

This is how investors are approaching different regions in the New Year.

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Please sign in or register to comment. It is free to register and only takes a minute or two.

UK: Caution, caution, caution

Upbeat is not a word to describe investor sentiment towards the UK in 2018.

Lower consumer confidence and the political uncertainty of Brexit have led investors to treat the country with considerable wariness.

Columbia Threadneedle views the UK as a global outlier in the synchronised growth upswing around the world and favours equities in Japan, Europe ex-UK and Asian emerging markets instead.

Alex Wright, manager of the Fidelity Special Situations fund, said investors should not expect continued outperformance from the FTSE All Share, but adds that increased volatility should throw up some interesting stock picking opportunities.

Similarly, Colin Morton, vice president and portfolio manager in Franklin Templeton’s UK equity team, is focusing on identifying companies with attractive valuations and cash flow that will perform well irrespective of macro considerations.

‘We’re prepared to consider taking a bit of extra risk if we feel it’s adequately reflected in a company’s stock valuation and demonstrates the potential to be rewarded,’ he said. ‘Having said that, I’m not expecting radical turnover in our portfolios in the short-term.’

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Europe: Good vibrations with an eye on the ECB

Both equity and fixed income investors are largely positive about the continent as political risks are receding and the economy is recovering steadily.

Concerns however remain about the impact of the European Central Bank (ECB) changing monetary policy.

Echoing the views of many, David Zahn, head of European fixed income at Franklin Templeton, sees the eurozone’s cyclical recovery continuing, as consumer confidence rises and business spending increases.

‘The current expansion seems durable and well distributed among the member states,’ he said. ‘Despite this upbeat outlook, as long as inflation is weak, a significant shift in the ECB’s policy is hard to envisage.’

Likewise, Columbia Threadneedle CIO Mark Burgess says that while he continues to keep an eye on the ECB, both businesses and consumers are buoyant, with job creation improving.

‘Against this backdrop we believe European corporate earnings can grow by 15% next year. However, we are keep an eye on the end of QE and potential interest rate rises,’ he added.

But Rathbones head of multi-asset investments David Coombs is less positive, favouring US equities.

‘European inflation appears likely to remain muted. Growth has probably peaked, at 2.5%, relatively low for a region heavily tied to global commerce, and there are still plenty of unemployed in the bloc,’ he said.

 

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The US: Safe bet or end of the run?       

Despite fears that the equity market will correct in the nera future, Rathbone's David Coombs and Bill McQuaker, who runs the Fidelity Multi Asset Open fund range, favour US equities. 

‘The US is home to several of the big technology companies that have done well in 2017, as well as having plenty of business that could fit into a technology-driven growth narrative,’ McQuaker.

‘They will offer exposure to a momentum-driven rally, but if equity markets turn more volatile, US stocks tend to be reasonably defensive, and would represent a relative safe haven amongst equity regions.’

Matthews Asia’s CIO Robert Horrocks, however, thinks the US bull market is petering out and prefers Europe, Japan and China.

He says that a tightening cycle is well underway, while policy proposals from the Trump administration appear to be a last ditch attempt to squeeze more money out of the worker to keep corporate margins high and the stock market rolling on.

‘How all this ends, with a bang or a whimper, I just don’t know,’ he said. ‘But the change at the helm of the Fed has to be a worry and the bond market, via the two-year to 10-year yield spread, is signalling caution.’

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EM: More of the same, with more modest returns

Returns are expected to slow after what has been a strong run but Asian emerging markets are still in favour with many. 

Tom Wilson, head of emerging market equities at Schroders, believes the outlook for equities in the region remains positive, albeit expecting more modest outperformance.

He identifies three factors that could weigh on the positive outlook for EM: a China slowdown, global liquidity tightening and the prospect of a protectionist US trade policy.

‘There has been a trough in the returns cycle and return-on-equity is now recovering. This is supported by improved economic conditions, in combination with prior corporate action on capital expenditure and operational efficiency,’ Wilson said.

Stuart Parks, head of Asian equities at Invesco Perpetual, is also positive, adding: ‘We believe there is scope for Asian markets to go up in-line with earnings growth in 2018.

‘The consensus earnings per share growth forecasts [is] 10% for 2018.’

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Japan: value, value and more value  

Relative and absolute valuations were the mantras of the Japan bulls.

Psigma said: ‘We have now held an optimistic view on Japanese equities for more than six years and this long term investment idea remains a key part of our investment strategies. Japan is currently enjoying a moment in the sun, with the Japanese stock market rising strongly on the back of a stable political situation, good economic growth and continued support from the Bank of Japan.

‘While all of these factors are undoubtedly helpful, the more alluring factor for investing in Japanese companies is the change that is taking place at a company level.

There is a corporate change revolution taking place that we first identified three years ago and the better treatment of shareholders and improved management of their operations by management is creating a rewarding investment opportunity in many Japanese companies.

We continue to view this dynamic as a multi-year investment opportunity, which when combined with the attractive relative value of Japanese equities and our forecasts for decent regional profits growth next year leads us to persist with our overweight stance.

Adrian Lowcock investment director Architas substantially agreed with that assessment: ‘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 PE of markets hasn’t changed much.  The economic climate also remains supportive of further stock market gains.’

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