After a year of geopolitical uncertainty, surprising politics and monetary easing from central banks, some pundits are surprised 2017 is ending on an even keel.
Volatility is less than half its mid-2015 levels, and neither the election of Donald Trump nor the Brexit talks have spelled out capital market calamity – US markets, in fact, recently reached numerous record highs.
As Nathan Sweeney, senior investment manager at Architas, pointed out: ‘Despite the backdrop for 2017, we’ve had a strong year for equities and the key question is whether it can continue.’
Below are five top equity market picks for ETF investors for 2018.
US small caps
Damian Barry, senior investment manager at Seven Investment Management (7IM), said he expected a pull-back in growth stocks in favour of value now that the valuations of US equities appeared stretched.
‘US tax reforms look likely to go through in some shape or form, which will benefit smaller companies more,’ he said. ‘All the surveys and hard data point to a strong and increasingly confident consumer.’
ETF option: The SPDR Russell 2000 US Small Cap UCITS ETF tracks the Russell 2000 small-cap index and costs 0.3%.
After decades of deflation and a protectionist, cost-cutting mindset from companies, both older and younger Japanese investors are swapping out of overpriced fixed income assets and turning to equities. This is a trend that global ETF investors can also benefit from, said Sweeney.
‘We are overweight Japan, as valuations are much more attractive relative to the US, Europe, and emerging markets – we see a structural change,’ he said.
ETF options: The Vanguard FTSE Japan UCITS ETF costs 0.19% while the £1.3 billion db x-trackers MSCI Japan Index UCITS ETF comes with a fee of 0.3%.
One of the star performers of 2017, Europe is still a key pick for asset allocation experts in the New Year.
7IM’s Barry said: ‘We’ve been overweight Europe for a good while: positive economic fundamentals, improving earnings and gross domestic product upgrades all continue apace, with lower political risk, albeit the risk is still there. If interest rates rise, we might expect to see a rotation away from growth companies, which have enjoyed a 10-year rally, back in favour of value.’
Oliver Smith, portfolio manager at IG, said Germany was benefiting from economic expansion, quantitative easing and rising corporate profits in Europe. He said any weakness in the euro would boost German exporters.
‘Despite ongoing election uncertainty, the German market is well positioned to take advantage of this, and trades on a forward price-to-earnings ratio of around 14x,’ he said.
ETF option: The giant £4.9 billion iShares EURO STOXX 50 UCITS ETF costs 0.16%. More than two-thirds of the fund are invested in French and German companies.
IG’s Smith said valuations on Turkish equities appeared attractive, with the market trading on 8x forward earnings and 1.3x price to book.
‘A weak currency, an autocratic regime and ongoing problems in Syria appear to be fully priced into markets and give cause for optimism should anything improve,’ he said.
ETF option: The Lyxor Turkey (DJ Turkey Titans 29) UCITS ETF costs 0.65%. Financial services make up more than 42% of the exposure. It is 9 points cheaper than its larger counterpart, the iShares MSCI Turkey UCITS ETF.
India also makes the list as another emerging market heavyweight for the new year. Barry claimed that investment in India as well as improvement in infrastructure had made the country more business friendly.
‘What prime minister Modi has achieved has been impressive: the reform agenda has been more than anyone expected, what with reforming taxes, cutting corruption, improving bank balance sheets,’ he said. ‘For example, the government has helped banks by recapitalising poor performing loans at state banks.’
ETF option: The Lyxor MSCI India UCITS ETF (INRL) is the most expensive choice with a charge of 0.85% but has by far the most assets at £900 million. Financial services, consumer cyclical stocks and technology make up around half of the fund.