"The recent agreement on the Brexit transition phase may lead to greater investor optimism in the near term. However, uncertainty remains high"
Switzerland. The eurozone recovery, strong business sentiment and weak franc are all good news for SMI companies, which generate more than 70% of their revenues abroad. However, earnings forecasts were revised down in recent months and valuation is expensive in relative terms. Moreover, the Swiss market will derive little benefit from global growth given its heavy exposure to defensive stocks.
UK. We still believe that UK equities will lag developed market peers. Economic weakness will weigh on corporate profit growth this year while recent sterling strength will hit exports and overseas revenues, which account for around 70% of FTSE 100 companies’ sales. In addition, return on equity is depressed and price momentum is negative. The recent agreement on the Brexit transition phase may lead to greater investor optimism in the near term. However, uncertainty remains high and we would remain cautious on UK equities.
Japan. In the short term, Japanese equities will continue to face headwinds, including a stronger yen, trade concerns and political risks. If Prime Minister Shinzo Abe were forced to resign, investors could question the ability of his successor to continue reforms. Five years into Abenomics, corporate governance has improved and companies have focused more on improving corporate profitability and returning earnings to shareholders. The return-on-equity of the MSCI Japan is close to 10%, its highest in a decade. In addition to these structural tailwinds and attractive valuation, Japanese equities also benefit from a positive economic environment. The economy is growing above potential and inflation is well below the 2% target, allowing the Bank of Japan to keep its ultra-accommodative policy.
Asian equities – tech concerns won’t last
"Despite the recent turmoil, the technology sector will continue to benefit from the growing automation and digitalization of the world economy"
Emerging markets. The economic context will turn a little less supportive in the short term because of a mild slowdown in China, Fed rate hikes, rising global yields in the wake of inflation, and investor concerns about protectionism. However, global trade growth will remain solid thanks to the ongoing expansion in developed economies. In addition, oil prices have bounced back these last two years, helping commodity producers and large countries such as Brazil and Russia recover from recession.
Despite the recent turmoil, the technology sector (which accounts for a significant share of the EM Asia index) will continue to benefit from the growing automation and digitalization of the world economy.
After a strong 2017, corporate profits are expected to grow at a slower but still elevated pace this year (15% vs 23% in 2017 according to the IBES consensus). Profit margins and return-on-equity have also improved steadily since mid-2016. In addition, absolute and relative valuations remain attractive and a weak US dollar will again support emerging markets.
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.