Global Stock Market Viewpoints: Fourth Quarter 2017Submitted by Castlebar Asset Management on January 8th, 2018
Global stocks hit two milestones in 2017. First, international stocks outperformed US stocks (S&P 500) for the first time since 2012. Second, international stocks did not have a single down month this entire year. This was the first time in the history of the index that it happened. 2017 was quite a year! The primary drivers for returns were upbeat economic data around the world, as well as, a weaker US Dollar. All forty-five developed market countries posted positive economic growth in 2017 and are expected to grow in 2018.
Europe is seeing its economies grow at their fastest pace since 2007. Some people are suggesting there is a Euroboom happening. This is a significant turnaround when there were fears that the Euro might collapse just a few years ago. Europe is seeing its economy grow for the fourth straight year and is expected to expand around 2.4% for 2017. At the start of the year growth was only projected to be 1.7%. Manufacturing is doing terrific with recent manufacturing data showing their strongest readings since 2000. The positive momentum has help lift stocks this year.
Politics largely took a backseat during the fourth quarter. Spain is an area of concern as Madrid and Catalonia are navigating a difficult issue regarding Catalonia’s independence. This is largely seen as an internal issue within Spain and not a referendum on the future of the European Union. Germany has not been able to successfully form a government after their September election. This has been a nonevent so far for investors. Italy is set for another election this March. It is anticipated that no party will be able to win enough support to establish a government, so Italy will kick the can down the road of much needed economic reform.
We expect stocks in Europe to have a good year although the bar has been raised. With 2017’s positive performance on the back of better than expected economic and corporate earnings growth, it won’t be as easy to meet expectations. There are four things working in Europe’s favor; 1) earnings are great, 2) the economy is improving, 3) the European Central Bank is still accommodative and 4) the Euro strength has not hurt exporters as much as expected. These factors should support stocks in 2018.
Japan is seeing the benefit of their structural reforms with growth rates reaching their best performance in several years. Investors pushed money into Japanese stocks as they offer the most attractive valuations relative to other markets. The Japanese market is trading at 18.3x trailing earnings which is a 20% discount to the US. Earnings are expected to grow in the low teens for the next few years. Fiscal and monetary policy in Japan remain accommodative. Japan plans to keep their aggressive monetary policy in place until they see inflation growth above 2.0%. It currently stands at 0.9% so their accommodative position bodes well for stocks.
Canada, Australia & Asia
Australian and Canadian stock markets both benefited from a rebound in resource and energy prices in the quarter. Commodity prices seemed to find a bottom in the summer and rallied into year end which helped both markets finish the year strong. The biggest concerns that hang over both Australia and Canada are their inflated housing markets. The Bank of Canada did not raise rates in December as expected. Rates remain at 1.0%. The Asian markets were the best performers as strong earnings from technology companies lift these markets to fresh highs.
The US Dollar declined 10.2% for the year and 1.3% in the fourth quarter. The Euro was the best performing currency rallying 14.0% for the year. We are neutral on currencies headed into 2018. The tax cuts in the US will help the US economy in the near term. There is also speculation that between $200 and $400 billion could be repatriated back into the US. Much of the money is being held in foreign currency so this could help lift the US Dollar in the short term as companies covert it back into US Dollars. The main competitor to the US Dollar will be the Euro. The Euro Zone is set to have its highest growth in a decade and investors feel that its economy has more upside than the US from current levels.
You can read our 2017 Third 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.