EquitiesJan 10 2019

Where next for equity markets?

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Where next for equity markets?

Global equities were a volatile place in 2018 and produced little in the way of returns over the past 12 months.

The MSCI All Companies World index – which measures the performance of more than 2,700 companies in 23 developed markets and 24 emerging markets – was down 0.46 per cent in the year to the end of November, on a gross, total return basis.

“After a bearish end to 2018, financial market participants are preoccupied with the question of whether a global downturn is imminent,” says Neil Robson, head of global equities at Columbia Threadneedle. 

Question marks relating to a possible downturn in 2019 are justified, given the performance of equities over the past decade. However, the 2018 story has been a complicated one, and the performance of stocks in some geographies had vastly opposing fortunes to others.

The election of Jair Bolsonaro as Brazil’s new president suggests to us a return to more orthodox economic policies, despite some of his more extreme political rhetoric.Stephen Dover

This trend of differing fortunes, based on location is one widely predicted to continue throughout 2019.

“In the year ahead, we expect the growth rate of different regions and countries to vary meaningfully,” explains Kate Moore, chief equity strategist for BlackRock. “This will lead to investment opportunities and significant implications for risk assets across all different regions.”

Shifting dynamics

In 2018, it was the US that had the upper hand. North American equities made gross returns of more than 4.1 per cent in the year to the end of November, according to the MSCI North America index, compared to the MSCI Emerging Markets index, which showed a loss of 11.96 per cent.

Gains in North American stocks were predominantly driven by strong GDP growth in the second and third quarters of 2018 (4.2 per cent for the second quarter, 3.5 per cent for the third quarter) and sustained earnings growth in the S&P 500.

Emerging market stocks, by comparison, had a torrid year as a result of tightening US monetary policy and the continued looming threat of a global trade war.

Expected returns across asset classes in 2019

Source: Tilney and MSCI

Investor predictions for 2019 indicate a partial reversal of fortunes, however, with slowing growth in the US. Emerging markets, meanwhile, should see a return to convincing growth, according to fund analysts and portfolio managers.

“As the benefits of substantial fiscal stimulus from US tax cuts and greater public spending wane, US earnings and the broader global economy may have a hard time keeping pace with 2018 levels,” explains Franklin Templeton’s head of equities, Stephen Dover.

Mr Dover is far more bullish when it comes to the outlook for emerging markets and China, in particular, which he predicts will benefit from being more closely driven by its domestic rates of consumption.

He also believes Latin America “offers new promise”. 

“The election of Jair Bolsonaro as Brazil’s new president suggests to us a return to more orthodox economic policies, despite some of his more extreme political rhetoric,” he says.

Closer to home

The UK has certainly not escaped the volatility in recent months and 2019 is unlikely to be any different.

At the time of writing, most investors believed that a deal between the UK and the EU27 on the UK’s departure from the European Union was still possible, despite the chaos that played out in the UK political scene in mid-December.

However, many envisaged that an extension to the March 2019 deadline would be necessary.

“An extension of the Article 50 negotiation may prove necessary and there remain risks of a disorderly Brexit,” notes Goldman Sachs’ senior European economist, Andrew Benito. 

If the UK does manage to secure a Brexit deal, UK-focused companies would benefit significantly, according to Schroders’ UK equities fund manager Sue Noffke.

“There would likely be an upwards movement in sterling and a re-rating of the market,” she explains, noting that UK-focused banks, property firms, housebuilders, FMCG companies, retailers, media agencies and utilities are all currently trading on “depressed” ratings.

“This would be particularly beneficial to those UK domestic companies that have suffered a severe de-rating over the last two and a half years,” she says.

Income hunting

British companies could also provide a good starting point for dividend income, according to Ms Noffke, who explains that the current dividend yield of the UK stock market, at 4.5 per cent, is close to that seen immediately before and after the global financial crisis.

“The short-term outlook for underlying UK dividend growth has improved, due to the strengthened payout ratios resulting from rising commodity and oil producer profits,” she adds. 

“Meanwhile, that other big driver of UK dividends, the banking sector, is finally returning to form, 10 years after the global financial crisis.”

Looking at equity income from a global perspective, investors are tipping utilities, telecoms and healthcare to be among the sectors offering improving dividends in the year ahead.

Legg Mason owned Martin Currie has earmarked healthcare as a sector likely to witness “solid dividend growth” in 2019, particularly in the US, although the company’s head of income, Mark Whitehead, warned that the emergence of a Democrat as the next US president would have negative implications for the sector.

“In 2019, we will be looking for pipeline delivery and on-market drug sales momentum, as well as continuing strong cash flow generation,” he says.

“We will, however, be keeping a close eye on who emerges as the likeliest Democrat presidential candidate. A healthcare reformist in the White House along with a Democrat Senate and House would be likely to have negative ramifications for the sector.”

Joe McGrath is a freelance financial journalist