Archived News 12/01/2018
What does the new year hold for global equities?
Hector Kilpatrick, Chief Investment Officer at Cornelian Asset Managers takes an optimistic look at global equities in the year ahead.
Manufacturing and service companies across the globe are expressing optimism; inventory levels are falling and order books are growing. Furthermore, banks in the United States are easing lending terms to companies. Importantly, we believe that wage growth is likely to accelerate as the year progresses. This may hold back company margins somewhat but the positive benefits to end demand should be enough to see upgrades to aggregate earnings forecasts.
This positive outlook is further enhanced by the significant corporate tax rate cut enacted in the United States. This positive one-off earnings upgrade has now been largely anticipated by investors. What is less clear is how US corporates will react to the tax incentives to boost capital expenditure and also repatriate cash that had been stranded in overseas subsidiaries.
We anticipate corporate announcements of investment in the United States will build as the year progresses. This could lead to suggestions that productivity will improve such that economic growth can persist without inflation getting out of hand. Should investors start to believe this potential outcome then equities can continue to perform well.
Both the Eurozone and Japanese economies are also showing good signs of life. Eurozone manufacturing and service companies have seldom been so confident about the future. Unemployment is falling sharply and consumer confidence and spending is recovering. In Japan, Abenomics is beginning to show some bite both in the stewardship and governance of companies and also the economy where there are encouraging signs of a return to growth. It is more than 25 years since Japanese businesses were as confident as they are now (source: Bank of Japan’s Tankan survey).
So it is intriguing that despite the accumulation of evidence which suggests economic growth in 2018 and beyond is likely to be good, government bond investors are not buying into this reflation thesis. It would appear that bond investors believe that monetary policy tightening will push economies back into sub-par growth and that inflation will remain elusive. We think it is too early to draw this conclusion. As the year progresses, we expect investors will start to recognise that higher than expected interest rates are more likely and longer dated debt should start to underperform.
As long as this projected sell off in longer dated debt remains moderate, then risk assets such as equities and high yield corporate debt can continue to do well given momentum in company profits.
The stronger global economy should ensure continued decent demand for Chinese exports and Chinese domestic consumption growth is expected to persist. Furthermore, the formal banking sector is accommodating demand for credit which is being diverted from the shadow banking sector. So all-in-all we expect the Chinese economy to muddle through satisfactorily.
we think the outlook for equity markets is generally good, however for this to be sustained we will need to see a consensus forming that productivity will improve.
So in summary, we think the outlook for equity markets is generally good, however for this to be sustained we will need to see a consensus forming that productivity will improve alongside higher wages and increased investment and that the Chinese authorities are able to contain any problems that arise from their structural reforms.
Chief Investment Officer