Outlook 2018 - Global equities: Slower, but continued earnings growth

Outlook 2018 - Global equities: Slower, but continued earnings growth

Global earnings drove the equity markets in 2017 and that could continue in 2018, albeit at a slower rate. Japan’s resurgence is not over and has the potential to surprise investors. Geopolitical risk remains on the horizon and watch out for rising inflation.

What is your investment outlook for global equities in 2018?

In 2017, global equities were well supported by global earnings growth after years of stagnant corporate profits in US dollar terms. 2018 needs further profit growth to support equities, and at the moment the market does expect that to come through. I think there is a good chance we will see this profit growth, albeit at slower rates than we saw in 2017.

Chart 1: Earnings growth has supported the market in 2017

Source: Datastream, November 2017

What do you think could most surprise investors next year?

There is a lot of scope for surprise in 2018. One of the most surprising things about 2017 is how calm markets were and how they trended up gently.

In 2018, we could see more geopolitical uncertainty with a larger effect on markets than this year, but the nature and intricacies of such uncertainty are very difficult to predict.

The market could also be surprised by rising inflation. At the moment, inflationary pressures do appear under control but that could change if economies start to run too hot.

Regionally, Japanese equities are still well below the levels of the late 1990s, but in 2017 they reached a 25-year high. Earnings growth in Japan is expected to reach 20% in 2017, but consensus forecasts that rate to slow sharply in 2018, although it is still expected to remain in positive territory. I think there is potential for Japanese profits to surprise investors on the upside in 2018, resulting in another leg up in that market.

Chart 2: Japanese equities hit a 25-year high in 2017

Source: Datastream, November 2017

How do you plan to capture the best opportunities and add value for investors?

In 2017, most of the good new opportunities have been outside of the US, and so I have been tilting the balance a little towards other regions.

In 2018, I plan to concentrate on three disciplines:

 Corporate change - this is where businesses undergo change through corporate events such as restructuring, M&A and spin-offs. M&A activity should still remain fairly vibrant in 2018.
 Exceptional value opportunities - this is the ability to drive share re-ratings through delivering earnings growth in excess of market expectations. We have seen particularly interesting opportunities in emerging markets and Japan recently.
 Franchise and growth companies - these are businesses with a dominant position, strong growth and cash flow, and pricing power. The technology sector has provided opportunities recently and I continue to favour it, but in 2018 we could see more opportunities in the second-line of tech stocks, rather than the headline-grabbing big caps where risk could be rising.

JEREMY PODGER joined Fidelity International in early 2012, when he took over the reins of the Fidelity Global Special Situations fund. In June 2014, he additionally became portfolio manager for the FF World fund. Prior to Fidelity, Jeremy worked at Threadneedle, Investec and Mirage Resources. He started his fund management career in 1987 and has been managing global funds since 1990.

Jeremy has an MA in Philosophy from Cambridge University and an MBA from London Business School.


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