"Brexit concerns, slower economic activity and weaker earnings growth are all headwinds for the UK market."
Japan – Recovering at last. The Japanese economy expanded in Q2 for the fifth quarter in a row and is now in better balance thanks to a recovery in both consumer and business spending. Deflation risks have receded but inflation remains modest and well-below the 2% target, allowing the Bank of Japan to keep an accommodative stance. Solid domestic and external demand will boost corporate profits while valuations remain attractive. Corporate governance reform and sound company fundamentals will provide additional support to Japanese equities.
A consolidation in USD/JPY around 115 these next six months will also be supportive as the Japanese equity market has recently exhibited a negative correlation to the yen.
UK – Out of favour. Brexit concerns, slower economic activity and weaker earnings growth are all headwinds for the UK market. Earnings growth has slowed these past months as positive base effects faded. The UK market is highly dependent on sterling and commodity prices given its sector breakdown and large foreign currency share of total revenues. In coming months, weakness in sterling could help limit the damage.
Selectivity remains key in emerging markets
"Last year’s surge in commodity prices no longer supports resource producers, penalising markets highly exposed to Energy and Materials."
Emerging markets – we still prefer countries exposed to stronger global trade. Corporate profits and margins in emerging countries will continue to benefit from stronger trade flows. Valuations are also attractive, especially compared to developed markets. However, the slightly slower growth expected in China in H2 – as the impact of last year’s stimulus fades – and higher US rates could act as headwinds in coming months.
As a result, we continue to advice selectivity with a preference for markets geared to the upswing in global trade and to the technology cycle, i.e. emerging Asia. We believe the Indian market remains attractive in the long term as the ongoing structural reforms will raise its economic potential. We are more prudent in the short-term given the ongoing economic slowdown.
Furthermore, the positive impact of last year’s surge in commodity prices for resource producers has faded, penalising markets highly exposed to Energy and Materials – mainly commodity exporters such as Brazil and Russia. And our forecasts of range-bound oil prices in the coming six months will limit earnings growth potential.
Sources: SGPB, Datastream, 29/09/2017. 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.