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What 2018 will hold for equities: four top managers’ views

From re-emerging EMs to Asian expectations, a quartet of top investors predict the potential path ahead for the coming year.

Emerging markets

Looking to the longer-term will be the key to EMs in 2018 says veteran Carlos Hardenberg of Franklin Templeton. The sector specialist also names the specific markets to follow.

We think right now Asia is the most exciting region in emerging markets. It offers a range of opportunities, from China, South Korea, India and Taiwan to countries such as Indonesia. As fundamental stock pickers, we are equally excited about individual opportunities in other parts of the world, in places like Russia, which has recently fallen out of favour.

In such situations, we are finding companies we regard as extremely well run, growing at a fast pace, and providing exposure to key themes such as economic growth, demographic changes, and local consumer trends. Indeed, the relative “unpopularity” of these markets means that we have been able to add exposure to fundamentally strong companies at prices we considered quite attractive.

Similarly, we’re finding opportunities in Latin America. Brazil has just emerged from a prolonged recession and faced several challenges, including high unemployment and huge corruption scandals, but we are generally positive on the possibilities within that market given the new emphasis on reform efforts.

We are also finding appealing investments in other countries in Latin America, most notably Argentina. Last but not least, we are very excited about frontier markets around the world, not only in Africa but also in Asia and Latin America. We view these markets as offering the opportunities of tomorrow, ideally for longer-term investors with a time horizon of over five years.

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China

Having had a firm focus on its growth slowdown for a few years, 2018 will see China come back to the fore, according to Comgest’s Emil Wolter.

A common view today is that investors should stay long, high beta EM – provided the cycle is strong. But the fundamental dynamics have changed: the outperformance of EMs in 2017 has been driven by IT, which is quite unusual when compared to previous cycles.

Given this difference, what can we expect for the future? There is a growing recognition that China is – again – the driver of change for emerging markets. China has long been a smokestack economy relying on cheap labour. However, this growth model belongs to the past. Labour in China is no longer cheap as the country is targeting high income status in the next seven or eight years.

Today China is the largest market globally for robot sales, has the highest number of internet users globally, is third in global patent applications, has the highest number of STEM university graduates, and is the largest exporter of high value added products.

Innovation is thriving, particularly via the internet, but also in industrial and consumer applications. Over one-quarter of today’s unicorns come from China. These structural changes in China transform EM equities and are visible in the composition of the MSCI EM Index itself.

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Asia

A confluence of factors could provide a solid backing for the broad Asian market, says Stuart Parks of Invesco Perpetual. That is while the much-discussed consumption theme might slow considerably.

In our view, the outlook for earnings growth in 2018 is broadly positive. Consensus earnings growth expectations for 2018 have been gradually moving up over the course of this year and are now close to 10%. Recently, these expectations were boosted by China’s second quarter 2017 results season, in which almost two-thirds of companies beat expectations.

Elsewhere, consensus earnings estimates for the Indian market2 were marginally revised upwards for the full year 2018, post significant downward revisions over the summer months. Going forward, Indian earnings growth should benefit from easier year-on-year comparisons after the government’s demonetisation of high-value currency (November 2016) and the introduction of the Goods & Services Tax (July 2017) reduced prior year numbers.

These are the main factors which dominate the outlook for 2018 Asian earnings: domestic consumption (particularly in China), global economic growth, the interest rate environment and infrastructure spending. We expect consumption to remain strong in China, with support from wage growth, and to increase in India, driven by a very gradual revival in economic growth.

Elsewhere, we believe consumption may continue to be relatively subdued — in particular, the debt overhang in Korea, Malaysia and Thailand renders it difficult for these countries to stimulate consumption significantly. Infrastructure spending, an obvious kicker to growth in much of the developed world, is also a factor that should support growth in Asia.

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Europe

Expectations are high for Europe and positive macroeconomic data has Fidelity’s Matthew Siddle pointing to the positives. However, moving towards less risky companies may be a timely tactic, he adds.

Macroeconomic data are positive in Europe with GDP growth robust across the core and periphery. Consumer and business confidence are strong, and lead indicators are at elevated levels. This has fed through to the corporate level and we have seen returns and earnings for European companies begin to catch up with their US counterparts.

It is worth remembering however, that we are no longer early in the cycle, with European margins (excluding commodity companies) back to peak levels. This economic acceleration has fed a willingness to take risk, with investors increasingly paying up for risk whether it be in equities or credit, where plenty of European high yield corporates can now borrow cheaper than the US government.

This means that while I am positive on the economic environment for Europe in 2018, I am more cautious on the prospects for a series of riskier companies to outperform. Lead indicators are at highs not seen since 2007. Expectations are very high, and even a mid-cycle slowdown in lead indicators tends to drive rotation toward less risky companies. While it has not yet occurred, the timing of any market inflection is a very important question for 2018.

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Related Fund Managers

Carlos Hardenberg
Carlos Hardenberg
112/696 in Equity - Global Emerging Markets (Performance over 3 months) Average Total Return: 8.20%
Matt Siddle
Matt Siddle
275/604 in Equity - Europe (Performance over 3 years) Average Total Return: 23.28%
Stuart Parks
Stuart Parks
17/221 in Equity - Asia Pacific Excluding Japan (Performance over 3 years) Average Total Return: 49.60%
Emil Wolter
Emil Wolter
36/221 in Equity - Asia Pacific Excluding Japan (Performance over 3 years) Average Total Return: 44.92%
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