In focus - Markets
Investment forum 2019 | Outlooks on equities: "Results under pressure"
One of the first key events in the calendar is the annual Investment Forum run jointly by Schroders, Franklin Templeton and Invesco. For this sixth edition, three leading specialists were invited to Brussels to present the fund managers’ projections for 2019.
Alex Tedder (Head of Global Equities at Schroders)
Alex Tedder began by pointing to the inevitability of the poor performance seen in 2018 with the tailing off of a bull market that had lasted for almost a decade. “For a long time, the only decision to be taken was to overweight US equities. The fall in values posted last year was attributable to equities that had performed exceptionally well in the past ten years.” He pointed out, however, that the correction in values had begun before prices had begun to come under pressure.
“The current market value may seem attractive but we note that profit margins have been at record levels since the Bretton Woods agreements came to an end (1976) due to salary pressures, recourse to outsourcing and low interest rates. And we do not believe that these levels are sustainable.” Alex Tedder emphasised that this growth is based on two factors: firstly, salary growth, that is an increasing feature of the USA but also of Europe, and, secondly, interest rates, that will cease to lend support in the future.
“US companies in need of funding will be obliged to pay higher rates, while the level of debt in the non-financial sector has increased significantly in the USA.” He believes, then, that the consensus (which is currently predicting equities earnings growth of 7% at global level for 2019) is still over optimistic given that there will be a decline in corporate profitability.
At the same time, he stressed that, although the trade war has not yet had a major impact, this will not be the case in the medium term since the uncertainty has led to many firms postponing expenditure on investments for the coming months. “Likewise, Brexit has led to many companies putting a halt to their development projects in the UK pending greater clarity.”
In terms of investment strategy, Alex Tedder said that a diversified position across the different sectors and geographical areas was needed given that the conditions would continue to be volatile and the current lack of clarity on the financial markets. For that reason, he felt that it now made sense to expose part of his portfolio to gold in order to protect against periods of extreme volatility.
“For investors operating on the stock markets, the current conditions do, however, offer many opportunities.” He indicated, for example, that sentiment had been hit hard over the last few months of 2018, which had been “among the worst in the last decade”, but that the technology sector still had significant potential. “We will be on the outlook for opportunities where there is disruption, since this tends to create massive opportunities that are generally under-estimated by the market.”
He also pointed to the opportunities offered by climate change and sustainable investments. In contrast, he is somewhat cautious about the prospects offered by European equities. “There are a large number of very good companies, but there are too many structural problems at present and so investors prefer to look to the USA, Japan or the emerging markets.”
With regard to the latter, Alex Tedder also said that they had to ride out plenty of bad news in 2018, resulting in very low expectations now. “However, all that is needed are a few positive signs for this to have a positive impact on earnings expectations for emerging-country companies.” In this regard, he favours in particular the prospects for markets such as India, where many favourable developments meriting investors’ attention continue to be seen.
The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
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