• Equities

Equities, where next?

Richard Saldanha discusses the outlook for global equities.

3 minute read

Equity investors have enjoyed an easy ride for much of the past decade as a result of the extraordinary polices implemented by major central banks. Initially, these measures helped stabilise economies in the wake of the global financial crisis, and have now paved the way for robust and broad-based growth.

Indeed, policymakers now believe that the global economy is strong enough to be weaned off life support. They are looking to hike rather than cut interest rates and will gradually turn off the taps that have seen trillions of dollars flow into financial markets and prompted a surge in the value of bonds and equities.

So given that many equity markets reached record highs in 2017, where are they likely to head next?

Rising interest rates are likely to provide a headwind for share prices, but it should be remembered that central banks’ assistance is being withdrawn for a reason, namely stronger economic growth.

Rising interest rates are likely to provide a headwind for share prices, but it should be remembered that central banks’ assistance is being withdrawn for a reason, namely stronger economic growth. That should feed through into higher profits, which ought to support share prices. That’s because reported profits, and expectations of future profits, exert a major influence on the direction of a company’s share price.

The prospects for European equities seem particularly positive given the rapidly-improving economic background. There also seems less chance that political shocks will rock the euro-zone, while European shares appear attractively priced compared to other global markets.

Elsewhere, the positive global economic outlook should benefit emerging market economies, many of which are driven by exports. Although share prices in these markets have already increased sharply in value, they remain significantly lower than in developed markets. That discount looks excessive, especially given the pace at which profits growth in emerging economies has outstripped that seen in developed markets.

However, on a word of caution, it is important to note that the rally in emerging market equities has been driven largely by China, specifically some of its largest technology companies. So an economic or political shock in that country, not that we are expecting either, could threaten emerging market stocks in general.

The picture is more mixed for the US. Although profits have been growing strongly, share valuations look high relative to other regions. Nevertheless, the prospect of tax cuts should help support US stocks, since companies will be able to retain more of their profits which they can feed back to shareholders.

Financial stocks could also benefit from the appointment of the new head of the Federal Reserve, the US central bank, given that he is believed to favour lighter-touch regulation of the sector, which should be positive for profits growth.

On the other hand, US sectors such as telecoms and retail remain challenged. And if interest rates were to rise faster than expected, highly-indebted companies, especially smaller businesses, could be vulnerable.

The outlook for UK equities is clouded by the uncertain political and economic outlook, although there are some opportunities among individual stocks. The big oil companies, for example, look attractive given the strong rally in the price of oil since last summer. The UK also has a few world-leading technology companies of varying sizes and some continue to look appealing long-term investments.

So overall, equities should be able to make further advances this year given the improving global economic outlook and the positive outlook for profits growth. But, as ever, there are risks and some markets certainly appear to offer greater potential than others. Carefully assessing which stocks and markets to plump for, perhaps by investing via a professionally-managed fund, may be a prudent strategy for investors.

Author

Related views

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.