Global Stock Market Viewpoints: First Quarter 2018Submitted by Castlebar Asset Management on April 17th, 2018
Global stock markets pulled back this quarter. Stocks started the year off strong but sold off in February and March. This ended the streak for positive consecutive positive months at 13. The sell off can be attributed to trade tensions, a slumping US Dollar and economic data that missed expectations. Global equities fell almost 5% in local currency.
Concerns that European economic growth is losing momentum weighed on shares this quarter. Europe saw its strongest economic growth in a decade last year, so expectations were raised heading into this quarter. The initial economic data has been softer than expected but still positive. This winter has been particular cold and snowy in Europe. The UK saw its coldest winter in 27 years and there was significant snow fall as south as Rome. Poor weather can impact or delay shipments and spending which can impact economic activity. The stronger Euro has hurt exporters as well. We will continue to monitor the economic data to see if this is blip or a shift in their economic growth story.
A catalyst for stocks should be a continuation in mergers and acquisition activity. This quarter, deal making was up 56% over the same time last year. The total announced deals are $394 billion. Mergers are more attractive in Europe because of the low borrowing costs, pressure for continued revenue growth and increase shareholder activism. Companies have been responding to an uptick in shareholder activism by acquiring, merging and selling off assets at the fastest pace in years.
We remain optimistic about stocks in Europe. The market valuation is reasonable compared to other developed markets. The European market is trading at 15.1x trailing 12 months earnings, compared to 16.6x average over the past 25 years.
Japanese shares were flat for the quarter in US Dollar terms but declined over 5% in Yen. Investors were troubled over a political scandal, the rising Yen and global trade tensions. Prime Minister Abe has seen his favorability ratings plummet as a scandal involving government land being sold to a school with ties to his office. The allegations of cronyism may weaken his ability to move economic reforms forward. The rising Yen and fears over a trade war also hit the export sector hard in the quarter. Despite these negative headlines corporate earnings still look great in Japan. Each of the past two years earnings have surpassed expectations by a wide margin.
Canada, Australia & Asia
Canadian and Australian stocks were the laggards this quarter. This was the worst quarter for Canadian stocks since the third quarter of 2015 and was the worst first quarter since the financial crisis for the Australian market. These markets were largely impacted by events outside of their borders. Weakness in energy, materials and financials sectors lead to a pull back. Concerns over tariffs impacted the materials sectors which makes up a meaningful portion of the Aussie and Canadian market. Both markets have seen their valuations come closer to historical averages but are still rich. The Aussie market is trading at 16.5x trailing earnings versus a long term average of 15x. Canadian shares are trading at 13.9x forward earnings estimates.
The US Dollar posted its firth straight quarter of declines. Concerns over trade issues and strengthening economies outside of the US lead to other currencies gaining on the US Dollar this quarter. The wave of repatriation of overseas money back to the US post tax cuts either did not happen or has had little to no impact on the currency markets. The market sentiment is cautious towards a US Dollar in the next few months. History also shows that in periods of global economic growth the US Dollar tends to weaken. A weaker US Dollar is beneficial for your international investments, but it can make your international travel plans more expensive.
You can read our 2017 Fourth Quarter Global Market Viewpoints here.
Andrew Comstock, CFA
Please contact me at 913-660-0708 or by email to discuss your financial planning and investment management needs. You can sign up for our monthly newsletter here. Follow me on Twitter @CastlebarAM.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.