Stocks are still attractive, 2018

Hayder Tawfik

2017 was another good year for international equity investors worldwide. The US Standard & Poor’s 500 was up more than 19 percent, the Nasdaq up 28 percent and the Dow Jones is up by 24 percent. The Japanese stock market enjoyed one of those good and rare occasion as it has risen 19 percent last year. The European Euro Stoxx 50 is up by 9 percent which somehow below the excellent performances elsewhere. The outlook for the Eurozone economies have improved significantly over the past few months. This sets up the ground for good performance for European equities for the next couple of years.

The US S&P 500 index which has done very well in 2017, also should have a good performance in 2018 if the price/earnings ratio remains constant as it has for the past two years. The S&P 500 should be up, in line with earnings of about 11 percent, year-over-year on revenue growth of about 5 percent, off record levels reached in 2017. Market expectation is that most of the S&P 500 corporates should deliver good earnings for 2018. Also, the earnings per share for the Morgan Stanley World Index (MSCI AC World Index (ACWI) is above $30.

Equity investors should take the comfort from the fact that global economic growth has been expanding over the past few years and is expected to increase further into 2018/2019 as reported by the IMF and the World bank. All the largest economies that are tracked by the Organization for Economic Cooperation and Development is expanding. Economists are forecasting acceleration in world gross domestic product in 2018 and 2019 from 2017 levels. Chinese economic growth should register 6.8 percent growth for 2017. There has been a noticeable and gradual transformation of the Chinese economy. Domestic retail sales and consumption plus industrial production and fixed asset investment have been contributing greatly to the Chinese Gross Domestic Products.

Most central banks in the developed economies are still pursuing easy money policy that has helped in accelerating economic growth and contributing to very positive financial markets. The ECB, BOJ and PBOC continue to pump far more liquidity into the global economy than is removed by Federal Reserve’s tapering and the Federal Reserve’s balance sheet topped out three years ago anyway so it’s not like that has been the marginal driver of the equity bull run in the first place.
Europe and Japan continue with quantitative easing policies. Corporates in the US have been leading the way in bond issuance. Money raised from bond issuance has been used for stock buyback, increase in dividend, acquisitions, retiring expensive debts and capital investments. These activities have been bullish for stocks. Overall, corporate balance sheets are in much healthier position than in the past.

Relatively and historically global inflation levels has been low, averaging around 2 percent in the US. It is roughly the same in the developed economies. This low inflation level has supported central banks in keeping interest rates on the low side. Globalization and the efficiency of modern technology are the most important drivers of the muted low level of inflation. It is most likely that inflation rate will stay on the low side for the next couple of years.

The US passed tax reform which is an historical event that should have very positive ramification not only for the US economy and its financial markets but also for the rest of the world. There have been some debates about its impact on the US economy but it is certainly very positive and awesome for US equities. Europe needn’t be excluded from the rally despite the appreciation of the euro, as the historical low level of unemployment in Germany and falling elsewhere in the Eurozone should lead to more consumption demand and corporate capital investments.

Over the past few years, the technology sector has been transformed in a way that was never imagined. This transformation has created market shift to technology, strong secular growth drivers. Some of the big technology companies have aggressively shifted their business into retail, entertainment, media, advertising, auto industry and the industrial use. The shift to a technology dominated economies increases efficiency, gives customers greater choices and at the same time keeps inflation on the low side. But above all it provides a boost to earnings growth rates.

Another boost for US corporate earnings is the weak US Dollar. The dollar measured against the basket of developed economies is down on average of 9 percent throughout 2017. This makes US goods and services that are produced and supplied form the US more price competitive abroad.

The equity supply/ demand is still positive and should continue for the rest of the year. International investors are putting more money into the stock market whenever there is an even a small dip or correction. This proves that equity investors are still pouring more cash into global stocks. It is the optimistic sentiment that has supported the global stock markets over the past few years. If short and long-term interest rates stay on the low side, fresh money should continue pouring into equities.

I believe that there are strong and good reasons for a positive outlook as we go into a new year. @Rasameel

By Hayder Tawfik


This article was published on 08/01/2018