Positive Indicators: What should Investors Expect from Global Equities
In this video update, Alex Crooke, Head of Global Equity Income, provides an update on equity markets explaining how the current economic environment is providing a supportive backdrop for businesses and for equity investors. He also covers why financial and energy stocks look attractive.
Markets have surprised many this year. We go back to the beginning of the year, we had a lot of challenges around political events, elections in Europe, sort of fading enthusiasm for reforms that Trump would deliver in the U.S., very strong dollar from the year before. And actually, company profits still are stagnating to some extent. And as the year has developed, actually many of these issues have sort of eased back and allowed share prices to appreciate over the year. We have seen better election results in Europe, actually the U.S. dollar did weaken generally through the year. But as we look forward now, there are still plenty of challenges admittedly geopolitical risks around the Middle East and the Korean Peninsula. But I think actually if we look at the economic terms and look forward in those areas, we can be a lot more positive. We have seen activity through the year and into the summer pick up, so manufacturing activities, PMI indicators, unemployment is still falling or is very stable in many parts of the world, and this is leading to a good backdrop for business to operate. So we are certainly seeing corporate earnings on a global scale being predicted to be in the mid-teens, sort of between 10 and 15% growth this year, which is a very good backdrop for investing in equities.
So two areas we are looking at are financials and energy stocks, two areas which are trading at cheap levels at the moment as investors see challenges to both those industries. Let’s start with financials. What are the opportunities here? Well, I said earlier we have seen coordinated economic activity and that is leading to increasing capital expenditure by companies. Recent surveys are showing that more and more companies are looking to intend to invest in their businesses and grow. That should lead to high lending numbers. So increasing bank growth lending should lead to the, so increasing bank lending should lead to higher profitability. We also believe that many of the stress tests and capital requirements for banks are now at levels which regulators are happy for. So we shouldn’t see increasing capital build, we should see the ability to grow and hopefully increase our dividends. So it is an area of market we are positive on going forward.
The energy sector has other dynamics though. We are seeing a lot of companies there, which are still reforming and trying to better their balance sheets, improve their balance sheets and return to sort of profitable growth. The oil price has certainly been increasing through the summer, which is helpful, but really I think the investment case for us is that these big energy and oil companies in particular have been reforming in a way they operate and the efficiencies in their businesses. The recent downturn in the last two or three years has allowed them to cut costs very materially and over time, that should lead to much higher profitability. So we are seeing volumes at a very good level, improving costs savings and also asset improvement in terms of selling high production assets and reinvesting in low cost assets.
All this we feel should lead to better cash flow in the coming year and higher share prices.
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