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2017 AIC fund manager poll: Europe and Emerging Markets most favoured regions for 2018 and beyond

12 December 2017

Results from the AIC’s 2017 fund manager poll and fund manager comments on the outlook for equities.

The 2017 fund manager poll by the Association of Investment Companies (AIC) found managers remaining positive on the outlook for equities in 2018, but Brexit and interest rates are causing them concern.

Equities remain the asset class investment company managers think is most likely to perform best in the coming year. However, managers are more cautious with 60% of managers thinking equities will perform best in 2018. This is down on the bullish 76% in last year’s poll. The majority (69%) think stock markets will rise next year but the remaining 31% say they don’t know if markets will rise.  

Where are the opportunities?

Europe and Emerging Markets are the top two regions managers think will produce the best stock market returns in 2018 and they present the most attractive opportunity on a five-year view. 30% of managers picked Europe as their region to produce the best stock market returns in 2018, while 23% chose Emerging Markets. The US, which was the most favoured region for stock market returns in last year’s survey, took third place (14%).

On a five-year view, there is more diversity from managers over which region presents the most attractive opportunity. Europe and Emerging Markets were the top two regions, each with 20%, while Asia Pacific ex Japan, UK and US were all next in line with 15%.

When it came to which sectors managers thought would perform best in 2018, a quarter (25%) chose Software & Computer Services, while 21% chose Banks. Financial Services, which was the most favoured sector in last year’s survey, is the third most popular sector with 13%. On a five-year view, Software & Computer Services remained the most popular sector with 22%.  

Optimistic in 2018

42% of managers said broad-based economic global growth across the world was the greatest cause for optimism next year. Perhaps explaining the diverse views of managers when it came to which regions they felt presented the most attractive opportunities. This was followed by 21% saying interest rates remaining low was their greatest cause for optimism, while technology driving economic growth and still finding opportunities in undervalued companies were joint third place, with 11%.

Causes for concern

The UK’s current situation regarding Brexit is the notable concern to managers in 2018, with 23% saying disappointing Brexit negotiations would be the biggest threat to equities in the coming 12-months. Interestingly, whilst 21% said interest rates remaining low was their greatest cause for optimism next year, 18% perceived rising interest rates as the biggest threat to equities in 2018.

Where will the FTSE 100 close 2018?

Last year, a third (33%) of managers thought the FTSE 100 would end 2017 between 7,000 and 7,500 and, so far, the market is on track to do so. Managers remain optimistic towards the FTSE 100 with 64% believing it will continue to grow in 2018 and end the year between 7,500 and 8,000. Whereas, 14% feel that the FTSE 100 will end 2018 as it started, between 7,000 and 7,500.

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies said: “While managers are generally positive on the outlook for equities in 2018, it’s revealing that they are more cautious than last year. Last year’s concerns focussed on Brexit and it’s the same again this year, with Brexit being the core issue. However, it’s clear that managers are still broadly positive about equities, with Europe becoming their favoured region for 2018 and technology’s star rising to be the most popular sector next year. The breadth of manager views emphasises the importance of investors having a balanced portfolio and taking a long-term view. If investors have any doubts about their investments they should speak to a financial adviser.”

Fund manager comments

  • The challenge for investors

Tom Slater, Joint Manager of Scottish Mortgage said: “There is a huge challenge to public market investors who must simultaneously grapple with increased market concentration, existential questions for large proportions of existing market capitalisation and an environment where many of the most promising new companies are unlisted and outside the investable universe. This is presented by a combination of the following factors. Firstly, the dramatic changes set in motion by the internet giants from the West coast of America and the East coast of China are still widely under-appreciated despite the size and profile of the companies involved. Secondly, the impact of new business models underpinned by technological progress and driven by a small number of increasingly powerful companies will be felt across a much broader swathe of the economy over the next decade.”

  • “People should not worry too much about politics”

Andrew Bell, Chief Executive, Witan said: “Equities are essentially a means of gaining exposure to the fruits from global economic growth so provided that 2018 continues the unexpectedly good and widespread growth experienced in 2017 time should be on the side of those invested in equity markets. Continued growth in corporate earnings set beside a very gradual rise in interest rates (as central banks take some pressure off the monetary accelerator) should provide a following wind.

“People should not worry too much about politics – economic influences are usually more important for both economies and markets and globally these remain supportive of continued growth. However, geographic diversification is sensible to dilute the effect of rogue politics affecting a country or region and to take advantage of an increasingly broadly-based upswing.

“When the economic brakes are being applied, those without seatbelts (or airbags) are at risk of hitting the windscreen. The principal risks are a political misstep by a leading global actor leading to a general fall in confidence, or rapid rate increases, whether occasioned by inflation rising more than expected or a central bank misjudgement of the risks.

“Greater selectivity is warranted, given above-average valuation levels and the increased disruption of established sectors by technological change.”

  • Continuing to find opportunities at attractive valuations

Thomas Moore, Manager, Standard Life Equity Income Trust said: “We continue to identify many examples of companies that offer good dividend and capital growth prospects at attractive valuations. The UK political environment remains highly uncertain, which has resulted in a divergence in valuation between stocks and sectors, as investors have tended to spurn small and mid-cap stocks in favour of defensive large-cap stocks.  Heightened short-term political uncertainty can result in a shift in investor focus away from corporate fundamentals, which has historically provided us with some of our most compelling valuation opportunities.

“We remain cautious on some of the traditional large-cap income sectors, such as Pharmaceuticals and Consumer Staples, where dividend growth is set to be constrained by weak growth and low levels of dividend cover. While we have recently found some valuation opportunities among large-cap sectors, notably Resources, we continue to identify superior dividend growth prospects within mid-cap and small-cap stocks.

“Throughout these uncertain times, we remain focused on identifying attractively valued stocks with the potential to surprise positively on the cash-flows and dividends that they report. Successfully anticipating positive change in a company’s fundamentals can act as the trigger for that company’s valuation to increase, driving the stock’s total return.”

  • “We are unlikely to have seen peak prices in equities”

Paul Niven, Manager, Foreign & Colonial Investment Trust said: “While there are inevitably risks which could derail the positive backdrop at this stage we do expect that 2018 will prove another positive year for equities. The global economy is exhibiting a broad based and synchronised upturn, and corporate earnings also appear relatively robust. This is helping to support equity valuations. 

“Interest rate rises and potentially higher bond yields may create some challenges for risk appetite in 2018 but inflation, while expected to rise, should remain relatively benign. This means that central bank action is unlikely to lead to a pronounced rise in yields, which would puncture already lofty equity valuations.

“The equity bull market has, up to this point, been unloved by investors but, with the US economic expansion heading towards the longest in history, we are unlikely to have seen peak prices in equities. We are continuing to invest in a range of strategies and with the prospect of rising dispersion in markets opportunities for active management should continue to increase.”

  • Finding companies that benefit from digital disruption

Lucy MacDonald, Manager, Brunner Investment Trust said: “There is a lot to be mindful of in the hunt for growth and income as we move into 2018. With a Tax Bill moving through the US senate, and a post-Brexit trade deal yet to be debated, it is crucial that investors stay both active and selective in the countries and sectors they choose to invest in.

“For countries, Europe has delivered a number of positive surprises in 2017 and early indications point towards another good year ahead. It offers investors relative stability and a strong positive vision for growth. Sectors are all facing renewed levels of disruption from a number of sources, but technology is often a common theme. Finding those companies that offer an innovative solution to a genuine problem, or companies that take real action towards digital adoption, are set to benefit from this disruption.”

  • Global growth and signs of capital and infrastructure expenditure “an encouraging tail wind for markets”

David Goldman, Co-manager, BlackRock Income & Growth Trust said: “We meet with a vast number of company management teams every year and a key theme coming through in recent discussions is that, despite Brexit uncertainty, businesses are encouraged by the improvement in global growth and signs of capital and infrastructure expenditure starting to pick up from previously subdued levels. This is an encouraging tailwind for markets and is presenting several fantastic investment opportunities.

“We remain believers that over the longer-term earnings and cashflow growth tend to be the dominant driver of share prices and where equity markets fail to recognise that, corporate buyers have the potential to exploit the opportunity. With a combination of sterling movements and the availability of cheap debt, we believe that M&A activity will remain a theme throughout the course of 2018.”

  • Uncertain times will increase investors’ focus on long term investment

Dion Di Miceli, Head of Investment Companies, Gravis Capital Management said: “We are living through turbulent and uncertain times with a convergence of macroeconomic events likely to create greater levels of equity market uncertainty over the coming years. At Gravis, we believe this will increase investors’ focus on investment ideas for the long run that are supported by non-correlated, long-term investments providing stable, predictable returns through market cycles. The investment company structure offers investors the optimal vehicle for accessing returns from such assets.”

  • Active stock picking returns

Graham Bird, Manager, Gresham House Strategic said: “2018 should see a return to active stock picking as the momentum trade which has driven stock market performance over the last five years stalls due to high valuations. The opportunities will come through valuation anomalies that have arisen and I expect investors to return to fundamentals, focusing on metrics including traditional value characteristics and cashflow return on capital.”

  • Outlook for equities remains strong

Walter Price, Manager, Allianz Technology said: “As 2018 approaches, the outlook for equities, and specifically tech equities, remains strong. We are seeing robust economic growth around the globe and technology is pivotal in driving a fourth industrial revolution. The US technology climate remains favourable and despite its recent strong run we believe the fundamentals of the sector have more to give.

“New technologies are changing the way we work and driving efficiency and productivity growth across a broad range of sectors. Whilst there are dangers posed by a slowing Chinese economy, it is our belief that those technology companies who are truly innovative and offer a real benefit to users will continue to benefit from corporate investment, and continue to flourish.”

  • A ‘goldilocks’ scenario for global equities

Jon Forster, Co-manager, Impax Environmental Markets plc said: “This is a ‘goldilocks’ scenario for global equities and in 2018, the next peak in economic data is possible.  We currently see more attractive valuations outside the US equity markets.”

  • Opportunities in UK smaller companies despite Brexit uncertainty

David Stevenson, Manager, Amati Global Investors, managers of Amati VCT and Amati VCT 2 said: “The UK economy has shifted down a gear in 2017, and much now depends on the Brexit process. The near-term outlook appears increasingly out of step with a positive global growth environment. We continue to believe, however, that the best strategy for investors is to back dynamic businesses offering durable growth based on a combination of technology, intellectual property and deep domain expertise. UK quoted smaller companies continue to offer a wealth of opportunities in this regard.”

  • In the midst of a cyclical upturn in the economy

Dale Nicholls, Manager, Fidelity China Special Situations said: “We are currently in the midst of a clear cyclical upturn in the economy. Supply-side reform in areas like steel and cement has helped lift pricing across a range of commodities. On the policy front, there is increasing rhetoric focused on the risks associated with the build-up of credit we have seen in the economy. This focus could become stronger post recent leadership changes – all positive in addressing our major concern for the long-term health of the economy. The environment remains positive for ongoing growth in consumption as part of the natural expansion of the middle-class, a key investment theme for the portfolio. While market sentiment has clearly turned more positive to the risk-reward balance around the opportunities in the Chinese market, we still find good value relative to the long-term growth potential.”

-Ends-

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Notes

  1. The survey was conducted with AIC member investment company managers between 7 November and 4 December 2017 on an anonymous basis.
  2. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment.  Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs.  The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 347 members and the industry has total assets of approximately £171 billion.
  3. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance.  The value of investment company shares, and the income from them, can fall as well as rise.  You may not get back the full amount invested and, in some cases, nothing at all.

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