Outlook 2018: Potential for sizeable US correction

US stocks risk a sizeable correction, having risen four-fold since the financial crisis, according to Tom Stevenson of Fidelity. Opportunities are elsewhere, particularly in Europe.

Europe

Valuations in Europe are attractive because of underperformance since the financial and sovereign debt crises. Sentiment is picking up against the backdrop of an accommodative central bank, according to Tom Stevenson, the investment director of Fidelity.

Whereas in previous years, Europe’s core would be where to focus investment, the current climb is across the board, so Stevenson believed that those that were hit harder in the Eurozone crisis, like Spain and Italy, may do reasonably well.

UK

The UK was the real laggard in 2017, compared to advances elsewhere. Stevenson though, is less negative this year. He expects the Brexit negotiations (which held back sentiment last year) to get more difficult, and growth to remain slow. However, the underperformance does mean valuations are now more attractive compared to Europe and the US. The yield is around twice what is available in other major developed markets, and even if dividends dip, stocks should remain attractive income wise.

Japan

Corporate Japan is becoming more investor friendly, Stevenson said, and inflation is picking up. The three arrows of prime minister Shinzo Abe’s economic growth policies are monetary easing, fiscal stimulus and structural reforms, aimed at countering the country’s lost decades.

The Nikkei 225 has more than doubled since Abe came to office, and is now at levels last seen in late 1991. Despite this, stock valuations are still not too stretched, the Fidelity investment director said.

China

In 2017 Chinese indices saw strong double-digit growth, but domestic A-shares have underperformed, and have much cheaper valuations than the likes of Alibaba and Tencent, Stevenson noted. 

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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