This year the equity markets have been very rewarding to investors. I do not recall having to miss coffee first thing in the morning to rush into the office and act upon turmoil in the markets.
However, I certainly cannot say the same for 2016 when we had started the year with an Asian crisis followed by Brexit and ending with Donald Trump as President of the United States.
Nonetheless equity markets continued to rally into 2017, posting excellent returns in the first half of the year. There is no doubt that the star performers during the period were emerging markets, with the iShares emerging markets ETF (IEMA) up 18 per cent in the first six months.
The US and Europe also generated positive returns with the S&P 500 and the Euro Stoxx 600 returning 10 per cent and eight per cent respectively over the same period.
A low interest rate environment, strong economic data, reduced political uncertainty, pro-growth central bank policies, positive earnings seasons and improved outlooks are the main reasons for the outperformance we saw in this asset class so far this year.
So which regions are expected to continue benefitting the second half of 2017?
Emerging markets
The concern that emerging markets are slowing down and will send the world into a global recession did not occur. On the contrary, Brazil and Russia moved out of a recession and China’s real GDP is expected to remain above the six per cent level in the foreseeable future.
Most importantly, China did not disrupt economic growth elsewhere. In fact, emerging markets are among the top performers so far this year and I expect this outperformance to continue in the second half of the year.
An investor can get exposure to emerging markets through the iShares Emerging Markets ETF (IEMA).
US stocks
There is no question that ever since the election of President Donald Trump with his pro-business agenda there has been a surge of optimism among businesses both small and large, which has fuelled a corresponding surge in the stock market and the value of the US dollar.
However, in the second quarter of this year, the dollar lost all of its gains against the euro after Trump was facing an uphill battle in finding enough votes to pass a Bill on healthcare reforms as senators opposed the updated measures, casting doubt on whether his other policies will be approved.
My view is that the rally in the equity markets will continue. It is currently a bull market and any weakness is still a buy
Nonetheless, the S&P 500 continued to rally strongly despite this hurdle, since even without Trump’s policies in place, economic data kept on coming out strongly.
Having already returned 10 per cent to shareholders in the first six months of the year, US stocks need further positive catalysts in order to continue rallying, something I find hard but not impossible to see in the second half of the year.
In addition, if Trump manages to pass the Bills related to lighter regulation across industries and the lowering of corporate taxes, US stocks will continue to outperform other markets.
An investor can get exposure to the US markets through the SPDR S&P 500 ETF (SPY).
European stocks
I started the year with the opinion that European equities will have a great year in 2017 and I continue to maintain this view.
The reason for this is that I expect economic data from the European region to continue coming out strong and for companies to continue to report favourable results and an improvement in future guidance. Most importantly, from a valuation perspective, I believe European stocks are attractively priced.
An investor can get exposure to the European markets through the iShares Euro Stoxx 50 ETF (EXW1)
Which stocks are expected to outperform the market in the second half of 2017?
Below are a few stocks I think will outperform the market in the second half of the year:
Societe Generale (GLE) EUR
Societe Generale is trading on a P/E of 11x. Given our positive outlook on the European economy and potential for interest rate hikes sooner rather than later, I believe this company should be trading on a higher multiple. Also, management reiterated that dividend is unlikely to decrease. The shares are trading on a gross dividend yield of 4.50 per cent.
Ryanair (RYA) EUR
Ryanair remains the best-in-class airline in terms of unit costs, profitability, cash generation and cash return to shareholders. With consensus earnings per share expected to come in at €1.26 in 2018 and using a PE multiple of 16x, we expect the price of Ryanair shares to move upwards.
Renault SA (RNO) EUR
Renault is a well-positioned in the industry, part of the biggest alliance of the world with Nissan. Renault’s 2022 targets are likely to be reached two years earlier. Renault shares fell nine per cent on March 15 on reports by the French media that Renault misled customers on emissions approval tests. Renault is trading at 6x earnings, and would typically trade between 8x and 9x earnings had these allegations been removed.
Amazon (AMZN) USD
Amazon is the leading e-commerce retailer worldwide. Today, Amazon controls approximately 20 per cent of US e-commerce and slightly less internationally, and continues to gain share at an accelerated pace. Additionally, the overall e-commerce pie continues to grow, as smartphone penetration, digital content, flash sales and increased internet penetration are collectively accelerating the shift from traditional retail to online. Despite Amazon’s dominant position, the company controls less than one per cent of global retail sales, and hence has enormous runway ahead. Amazon stock is up 40 per cent this year.
Home Depot (HD) USD
Home Depot has a strong growth trajectory given a solid macro tailwind and we believe the company can achieve meaningful gross margin upside. Along with favourable industry dynamics, HD is the market leader in the sector on sales, sales growth and profitability.
Mastercard (MA) USD
Our analysis of core fundamentals supporting the underlying drivers of Mastercard’s growth and profitability suggests further outperformance given the resilient global spending environment and continued growth trends.
Conclusion
Investors need to get exposure to the equity markets if they are counting on making a decent return in 2017.
With interest rates so low, returns from the bond market are limited. On the other hand, improved economic growth is contributing towards improved corporate financials, and forecasts make equities an attractive asset class to consider.
Despite equity markets rallying strongly, I believe there is still value out there. A well-diversified portfolio, which is focused on sectors that are expected to outperform in the current environment, should continue to reap rewards from the equity market.
My view is that the rally in the equity markets will continue. It is currently a bull market, and in my opinion any weakness is still a buy.
The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd is one of Malta’s leading financial services firm. The company offers a wide range of investment services including independent investment advice, live online trading, savings plans, investment management and fund services. For more information visit www.cc.com.mt.
Kristian Camenzuli is an investment manager at Calamatta Cuschieri.