Global equities ended 2017 at record highs, partly on the back of US tax cuts signed into law late last year, but also on optimism over the outlook for economic growth and corporate earnings in 2018.
Key points
- Shares end 2017 at record high
- Outlook remains reasonably bright for 2018
- European equities look especially good value
- We also favour emerging equity markets
The MSCI World index returned 1.13 per cent in local currencies, equivalent to 1.45 per cent in sterling terms. Over the course of 2017 the index delivered an impressive 19 per cent return. Among the leading markets, the UK was among the best performing in December, with the FTSE All-Share index leaping 4.78 per cent. Shares advanced in all of the other main regions too with the exception of Europe.
The outlook for global equities remains reasonably bright, notwithstanding the fact many markets are standing at record highs having risen at a breakneck pace in 2017.
Although rising interest rates and bond yields are likely to provide a headwind for share prices, it should be remembered that central banks’ assistance is being withdrawn for a reason, namely stronger economic growth. Since that should feed through into higher profits, it ought to support share prices.
The prospects for European equities seem particularly positive given the rapid improvement in economic performance across the region, and what we perceive to be reduced political risk. The European market is trading on a forward price-to-earnings (P:E) multiple of 15, which seems far from excessive, all the more so since economic growth within the euro zone may exceed market expectations next year.
Elsewhere, the positive economic outlook should also benefit emerging market shares. Although valuations have risen sharply, they remain at a roughly 30 per cent discount to those available in developed markets. That looks excessive, especially given the pace at which corporate earnings growth has outstripped that seen in developed markets.
We believe the Taiwanese market, with a forward P:E ratio of 13, looks especially attractive, not least since many of the country’s exporters should benefit from stronger global economic growth. We also like the Korean market.
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. Their dominance as a source of returns for emerging markets is of concern.
The picture is more mixed for the US. Although corporate earnings have been growing strongly, share valuations look high relative to other regions. Nevertheless, US stocks are likely to be supported at the start of the year by the prospect of tax cuts.
The outlook for UK equities is clouded by the uncertain political climate and economic outlook, although opportunities remain on a selective basis.
