Global Stock Market Viewpoints: Third Quarter 2017Submitted by Castlebar Asset Management on October 5th, 2017
Global stock markets continued their steady climb again this quarter. 2017 has been a remarkable year so far with the global benchmark posting gains every month this year. This is the first time this has happened since the index was created in 1988. The returns this quarterly were helped as all major economies around the world are seeing economic growth. The last time this happened was in 2006. Returns in local currencies have been good, but US investors have benefited from a weaker US Dollar.
The Economic picture in Europe is showing signs that it is back on stable ground. Economic growth is trending higher, unemployment rates are declining and sentiment among businesses and consumers is positive. This helped lift European shares over 4% in the quarter. Stocks remain relatively attractive compared to the US markets and are expected to see better corporate earnings growth over the next two year. We continue to be overweight in Europe and comfortable with the medium-term prospects for the market.
The final of the big three elections took place in Germany. Angela Merkel was voted in for her fourth term as Chancellor with little competition. The surprise in the election was the support for the extreme far right party, Alternative for Germany, or AfD. This party received about 13% of the vote and was seen as a protest vote over Germany’s handling of immigration and refugees. The AfD gains is a sign that the antiestablishment parties are still a lingering concern for investors in Europe. The next significant election will take place in Italy in early 2018.
Brexit negotiations are ongoing. The UK is asking for extremely favorable terms. The European Union is playing the waiting game. We think they’ll start to reach some consensus on major items in early 2018, but the clock is ticking for the UK to wrap up negotiations by May 2019.
Japan’s economy is experiencing its longest expansion in more than a decade and seeing its fastest pace of growth in two years. Their economy has seen six straight quarters of growth. This has lifted the Nikkei to its highest level in two years. Business and consumer spending has rebounded, a weaker currency has made Japanese exports more competitive abroad and stimulus from the Bank of Japan continues to help stocks. Shares in Japan look attractive relative to other markets. They are trading at close to a 40% discount on a price to book basis against the US and have a forward P/E of 14 times. Earnings are expected to grow in the low teens over the next few years. There have been several false starts over the past two decades, so investors are always a little hesitant about jumping into Japan with both feet. North Korea remains a looming geopolitical issue.
Canada, Australia & Asia
Canada market was lifted by a late rally in energy prices during the quarter. The Bank of Canada raised rates twice in the quarter. Those were the first interest rate increases since the financial crisis. Rates now stand at 1.0%. The Canadian economy has been growing at a quicker pace but housing is starting to be an area of concern. Home prices have moderated some recently but household debt is at record levels in Canada in part because of rising home prices. Australia was one of the weaker markets in the quarter. Concerns over their own housing bubble caused significant pressure on financial stocks and banks. Asian markets finished stronger as solid earnings won out over the region’s geopolitical concerns.
Currencies have helped your performance this year. The US Dollar continued to weaken against a basket of currencies. The Dollar fell 2.69% in the quarter and has declined 9.1% for the year. The primary drivers for currency performance have been improved economic results from Europe and Japan paired with a more dovish policy from the Federal Reserve in the US. Better economic performance around the world is increasing demand for their currencies and the US Dollar’s future interest rates won’t be as high as initial expected. It can help to put some context on where the US Dollar stands relative to other currencies. In the past we have said it was a great opportunity to travel abroad for Americans because of the strength of the US Dollar. Our stance has moved to neutral position. You won’t be getting a great value, nor overpaying if you are headed abroad over the next few months.
You can read our 2017 Second 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.