2017 was an excellent year for equity investors; the Euro Stoxx 50 and S&P500 rallied 10% and 20% respectively and it seems that the equity market does not intend to slow down in 2018.
However, back in January of last year, there were few optimists around. The main reason was that the economic expansion and bull market had gone on for almost nine years, making it one of the longest on record.
What did Investors worry about in 2017?
Investors were worried that a hard landing in China would result from the huge build-up in debt with a large portion of which was believed to be non-performing. The decision by the United Kingdom to leave the European Union made many investors nervous about the ability of the alliance to continue. Perhaps most importantly, investors didn’t know what impact a ‘Donald Trump presidency’ would have on the financial markets or the world economy.
What actually happened in 2017 to result in a rally in the equity markets?
The mood in the US shifted to pro-business, leading to expectations of less regulation and lower taxes. China continued to grow at an impressive rate, and Europe and Japan were doing well. We all worried about a military conflict with North Korea and sustained fighting in the Middle East, but overall it was a very good year.
Key themes for 2018
Favour eurozone core over peripherals & UK
To protect your portfolio from political headwinds (Catalonia, election in Italy, Brexit), limit your exposure to peripheral markets. Maintain a strong bias toward core eurozone countries with preference to Germany and France.
Take advantage of a steeper yield curve
Higher global growth and changing monetary policies will push global bond yields higher. Limit your exposure to Staples, Utilities, Telecoms or Real Estate; sectors that tend to underperform when bond yields are rising.
Keep exposure to the eurozone recovery through Consumer names
A lower unemployment rate and improved confidence should support eurozone consumers. Make sure your portfolio has an exposure to the Consumer Discretionary sector (example auto stocks).
Look for value in commodity-related names
Commodity-linked names in both the Oil & Gas and Metals & Mining sectors are still attractive on most valuation metrics and should benefit from resilient demand growth from Emerging Markets. Companies in this sector should benefit from solid economic growth in both Europe and the US.
Hedge against debt complacency
Leverage has increased in Europe, but corporate bond yields are near record lows. An investor can hedge against debt complacency with exposure to Pharmaceutical and IT stocks.
Conclusion
Optimism is a word that is much more at comfort going into 2018 than it ever was in 2017. Growth is a constant almost globally and deflation is off the vocabulary. Europe is forcing its way ahead and China is pulling up strongly. The United States continues to hover at high levels despite the Trump leadership. The Investment Managers are confident that 2018 will be another year where Global equities will shine with particular reference to Europe and Emerging Markets.
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is 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.