Investment Desk Bulletin

12 July 2017

Equities: Geopolitical to Geographic Divergences

By Renata Klita

In this week’s IDB, we look at the performance of equities since the beginning of 2017 and discuss the outlook for the remaining part of the year for different geographies.

Equities had a strong first half of the year, with dissipating political risk and return to growth after a few years of disappointment. Developed markets’ valuations look full in absolute terms however earnings momentum is still positive and supportive in the short term. Moreover, valuations do not look stretched when compared to other asset classes.

European equities are in a window of opportunity as the political risk premium has subsided and economic activity has accelerated. Meanwhile, US equities are benefiting from a weaker US Dollar and the possibility of tax reform is still higher than the market assumes. We think both of these regions have potential for yet more positive earnings surprise.

Conversely, Japan faces structural headwinds from increasing competition in the global export markets and the declining, ageing population. The UK is mired in political uncertainty. Additionally, net UK savings rates are falling, meaning that the debt-fuelled consumption is unsustainable.

Emerging Markets (EM) have been the best performing region for equities this year, with global cyclical recovery and a cheaper dollar driving performance. Valuations are attractive in both absolute and relative terms and the long term structural growth opportunity remains. The biggest risks are geopolitical tensions, with the Middle East and North Korea gripping the most headlines.

In light of these global geopolitical and geographic divergences, London & Capital are overweight US equities in global portfolios, maintain the domestic European exposure through the EuroDom theme, have reduced allocation to UK STAR, and own no Japanese stocks. Within EM, we favour domestic growth (e.g. India).