Hello and welcome to this month’s equity market review with me, Ritu Vohora.
Global equities continued to rally in November on the back of positive macro data, improving corporate earnings, and accommodative policy from around the world. Returns for euro investors though, were marginally negative.
Japan was again the top followed by the US. The US market was driven by growing expectations that tax reforms will be passed. Elsewhere, oil established a new trading range above sixty dollars a barrel as OPEC agreed to extend existing supply cuts to the end of next year. Gold was broadly flat over the month.
The cyclical regions of emerging markets and Asia lagged over the month, but year-to-date, both have outperformed strongly. History suggests the outperformance of cyclical regions is typical in a global economic upturn.
Looking at sectors, technology continued to dominate performance year-to-date, but the sector suffered a sell-off at the end of November, as investors took profits. Elsewhere, performance was fairly broad with consumer staples and consumer discretionary, the leading sectors.
Styles were mixed, with value outperforming in Europe, while momentum reversed in the US.
This year we have again been reminded just how challenging it can be to predict macroeconomic and political outcomes, as financial markets continued to demonstrate their resilience to unexpected events.
Despite heightened tensions on the Korean peninsula, elections in France and Germany, and a lack of progression of President Trump’s various reform plans, global equities have risen strongly in twenty seventeen. Much of the climb has been driven by improving fundamentals - supported by synchronised growth, lower-than-expected inflation and ample liquidity from central banks, as well as an acceleration of earnings growth.
In the eleven months to the end of November, global equities rose almost twelve percent, with all regions performing well led by emerging markets and Asia ex Japan. Europe also outperformed, having picked up strongly following the French elections in May.
With global economic growth broadly surpassing expectations, the best performing sectors have been cyclical. Technology has been the standout performer, up over thirty percent for the year so far.
It has been a narrow rally though, with a few select names dominating sector performance. These are the so-called ‘FAANG’ stocks in the US - Facebook, Amazon, Apple, Netflix and Google - and the ‘BAT’ stocks in China - Baidu, Alibaba and Tencent. The market cap of these companies grew by a staggering one point five trillion dollars this year, more than the entire market cap of the German market.
Stocks are beating all other asset classes so far this year. Given this strong run, how much more is there to go, as the pushbacks from the bears are getting ever louder? In fact, the current bull market is often described as "the most hated bull market in history". Many have called it artificial, or a bubble, right from the start. Yet at over a hundred months old, it’s the second longest bull market in history and the fourth largest in terms of its advance.
But bull markets don’t just die of old age. A substantial adverse macro shock could trigger a global recession, but the risk seems low with little evidence of a catalyst to trigger the end of the current cycle.
While we can’t ignore politics and macro noise, it’s important to remember that there’s always uncertainty in the markets. Today’s headlines look almost identical to those of fifteen or twenty years’ ago. But how much can we genuinely know about the outcome of these events let alone the likely market reaction? It is better to spend time looking at the facts and to focus on what is priced in today and how it could affect underlying investments.
Stretched valuations, signs of euphoria in some parts of the market, curve flattening and global liquidity peaking, are clearly important concerns. But we believe there are fundamental pillars that could help to sustain the equity rally. As global central bankers wind down quantitative easing and look to raise interest rates, companies' cost of capital and yield curves should begin to normalise. The world is moving into a period of stronger and more balanced growth, with global growth largely synchronised and a return of fiscal policy.
Indeed, for the rally to be sustainable we need earnings delivery to continue. For the past few years ample liquidity has lifted all prices, but since 2016 equity rerating has been modest thanks to earnings growth. Granted, equity multiples do not look cheap in absolute terms, but equities are offering an earnings yield of around 7%, compensating investors for taking on more risk.
Looking forward selectivity in equities will be increasingly important, with Japan, Europe and Emerging Markets offering decent earnings growth, but with margins far from peak levels.
Valuations are not cheap, but dispersions are very wide. The large spread between the expensive and very cheap companies provides opportunities for stockpickers to differentiate and achieve a higher probability of return. As investors, it is always right to challenge on valuation and while certain segments do look extended, there are opportunities to find good companies with solid balance sheets and fundamentals on attractive multiples.
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That’s it from me and I wish you a very merry Christmas and see you in the new year.