Cloudy weather keeps us neutral on global equities
- After the early February sell-off, global equity markets took another tumble in March as overheating fears were superseded by concerns about global trade and some tech stocks.
- The market correction has helped reduce overvaluation. However, the continuing series of Fed rate hikes and softer economic momentum should keep volatility high, leaving equity markets choppy in the near term.
- Global growth will continue to expand at a slower but still solid pace in coming months, which should keep corporate profits on the rise and monetary policy tightening very gradual.
Slightly underweight in the US
"High valuations will limit the benefits US equities will gain from strong earnings, boosted by tax cuts"
- US – slightly underweight. In the short term, tax cuts and a weaker dollar will help US firms record strong growth in earnings-per-share (EPS). The consensus forecast for 2018 has been upgraded sharply to nearly 20% vs 11.6% in 2017. However, upside will be limited in coming months – earnings forecasts are already high, margins are likely to be pressured by rising wages and financing conditions are less supportive given Fed rate hikes. Also, despite some improvement with the sell-off, valuations remain unattractive – the US is still the most expensive market compared to peers. Finally, investors are increasingly concerned by protectionism and tech stocks, the largest sector in the S&P 500. All in all, we remain slightly underweight within a global equity portfolio.
- Sector-wise, we keep our preference for Financials (rising interest rates will help improve net interest margins), Industrials (which will benefit from solid economic growth and greater capital and infrastructure spending) and Energy (rising oil prices, growing share of US shale oil in world supply). We are tactically neutral on Technology due to high valuation, stretched technicals and rising concerns about data privacy in some companies. However, in the longer term, the structural tailwinds from automation, digitalization and artificial intelligence remain strong. Conversely, we are more cautious on defensive sectors negatively impacted by rising rates (Telecoms, Utilities, Real Estate and Consumer Staples).
Still neutral in the eurozone
"Under the weight of euro strength and slipping business confidence, momentum in eurozone equities has reversed despite continued growth"
- Eurozone. Fading economic momentum and a stronger euro will lead to slower earnings growth this year (around 8% vs 12.4% in 2017 for the MSCI EMU). While trade war concerns could also weigh on business confidence, reducing visibility, equities should continue to benefit from robust growth in the eurozone and worldwide. With inflation still low, the ECB is unlikely to hike rates before mid-2019, keeping financing conditions loose. Profitability is improving slowly and margin expansion should continue thanks to muted wage pressures. Rising global rates will support Financials, the largest sector in European indices. All in all, we stay neutral on eurozone equities.
- We still prefer Financials (stronger private credit growth, higher rates) and Technology (growing IT spending & constant innovation). We are tactically neutral on cyclical sectors where the negatives of euro strength and lower business sentiment are offset by positives such as robust global growth, heavier capex (Industrials) and a bounce in eurozone consumer demand (Consumer Discretionary). We remain underweight on defensive sectors sensitive to interest rates (Telecoms, Utilities, Real Estate) given the expectations for higher global yields and slower EPS growth. Despite better margins and high profitability, Consumer Staples should record slower profit growth in 2018. EPS have been revised down while valuation remains high and relative price momentum is negative.
Sources: SGPB, Datastream, 29/03/2018. Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest.