Whitechurch Asset Views - January 2018
Global stockmarkets finished the year strongly with most leading indices in positive territory over December. They have started 2018 where they finished last year, with many breaking through record levels boosted by strong economic data and robust corporate earnings.
Having been the laggard for much of the year, the UK stockmarket showed strong outperformance in December returning 4.8% compared to the MSCI World index which increased by 1.1% (local currency terms). Markets were buoyed by constructive Brexit negotiations and strong performance from the oil and mining sectors. Yet the UK stockmarket remains one of the most unloved amongst global asset allocators going into 2018. As contrarians, we are thinking that the overly negative scenario might be priced in and we are seeing opportunities across several areas.
Overseas, the US stockmarket posted a first-time record of rising every month in a year – boosted by Trump’s tax reforms getting through Congress, which reduces the corporate tax burden for domestic companies. But it was Asia and Emerging Markets that continued to outperform as optimistic growth figures proved to be a key driver of investment flow.
Everyone’s a Winner
Looking back over 2017, all asset classes produced positive returns. The best-performing major developed equity market was, surprisingly, Japan. The Topix index returned over 22% (local currency terms) although a weakening yen diluted returns for sterling investors. An improving domestic and global economic backdrop translated into corporate earnings growth, providing market momentum.
The US stockmarket also gained in excess of 20% based on strong economic and corporate data but the gains were halved for sterling investors by a weakening dollar. Although European stockmarkets have underperformed just recently, it has been a good year for UK investors in Europe who benefited from economic and corporate recovery and a strengthening euro.
However, the star performers of 2017 have been Asia and Emerging Markets. Several factors have contributed to their robust performance: a weak dollar, rising commodity prices, and a rebound in corporate earnings, whilst a rally in technology stocks (particularly in China) has been a key driver for several of these markets.
Going into 2018, stockmarket volatility remains at historic lows, suggesting that there is complacency across equity investors compared to other asset classes and currencies. But stockmarket fundamentals are being strongly supported by synchronized global economic growth and strong corporate earnings against a backdrop of low interest rates. Understandably, this is providing optimism that the rally can extend into 2018.