Where to invest in 2018

In 2017 investors saw strong returns in global equities. Which countries could outperform in 2018? Find out what investments you should be watching this year… 

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
Where to invest in 2018

Best investments to watch in 2018

Investors in 2017 made strong returns in nearly all markets. A benign investment environment, helped by a weakening US dollar and strong corporate earnings growth propelled equity markets in many countries to new highs, making a mockery of those strategists with more bearish forecasts.

Emerging markets

Emerging markets performed strongly, after years in the doldrums. China in particular made large returns (up more than 40%) with outsized gains coming from ‘new economy’ tech stocks. Search engine Baidu made shareholders good money, while other Chinese  index heavyweights, Alibaba and Tencent, doubled in value. These three internet stocks are often referred to by the acronym BAT. 

Whether this can continue in 2018 is open to debate. The likes of James Anderson, of Scottish Mortgage, now the UK’s largest investment trust, believe technology growth stocks still have room to appreciate, but other investors are wary of the cycle ending.

Looking at the one and five—year returns charts below, we can see that China has performed much better than most other emerging markets. Fund managers, such as Fidelity, now forecast that it could be the turn of the Association of Southeast Asian Nations (ASEAN), countries such as Indonesia, Malaysia, Philippines and Thailand, to catch up in 2018. Certainly from a valuation perspective, these countries now look more attractive after performing very strongly in the years immediately after the global recession.

Developed Markets

Returns in developed markets were much more consistent in 2017, with Europe marginally outperforming the US, despite the fact that the rising Dow Jones index caught all the headlines, courtesy of President Donald Trump’s tweets each time another 1000 point marker was breached.

However, investors may want to pay more attention to five—year data, which clearly shows strong outperformance from the US, and a much poorer performance from the UK. Indeed, UK large cap stocks have been relatively weak performers over the past decade. The financial crisis, along with the end of the commodity bull market, impacted both banks and the large mining and oil firms that dominate the top 20 largest companies.

The Brexit vote of 2016 is still to be resolved — no one knows for certain what the outcome of the negotiations will be. And then there’s the possibility of a Jeremy Corbyn—led government, which has resulted in a marked disparity of investment returns between those firms that have a UK focus, and those that derive the majority of their revenue from overseas.  

Over the past 12 months we have seen a clear trend in the UK stock market: when the pound falls, stocks rise and vice versa. However, in the past quarter sterling has made strong gains against the US dollar, yet the market has been resilient, for example rising 5% in December. This may be because commodity price gains are doing enough to offset currency gains, which would reduce earnings otherwise. 

The chart below from the Financial Times, comparing the BAT high Brexit to BAT low Brexit, clearly shows the weak performance of UK domestic—focused companies since the referendum, with real estate investment trusts (REITs) in particular trading at a large discount to their net asset values. As we get more of an idea throughout 2018 of the outcome to the Brexit negotiations, this could be an area of value that starts to perform well.

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