We released our Global Investment Strategy document this morning, updating our views to take in to account the ongoing dynamic political and economic environment that we are experiencing.
The third quarter of 2017 provided investors with a continuation of the positive drivers that propelled equity markets higher during the first six months of the year. Several stock markets finished Q3 at all-time highs, buoyed by renewed hopes for US tax stimulus and a continuation of the positive economic performance across Europe.
For euro based investors, there were meaningful currency movements during the quarter as the euro advanced by over 5% at its peak against the dollar, settling with a 3% gain at the end of the quarter. Sterling also experienced a significant volatility against the euro during the quarter, losing 5.5% of its value at the lowest point, but the currency subsequently regained all its losses by the end of the quarter.
In the US, the S&P 500 increased by c.4% in local currency terms during Q3 and the Nasdaq Composite Index advanced by just under 6% over the same period, reflecting continued strong performance from large-cap technology companies and what has been a particularly strong year for semiconductor manufacturers.
There continues to be broad based optimism surrounding Europe and the level of economic growth that may lay ahead for the region. Supported by a strengthening macro-economic backdrop, most European indices increased by c.4% during Q3 with the FTSE MIB in Italy registering a gain of 10%.
From a valuation perspective, European equities, continue to trade at a discount to their US peers, suggesting that they have more upside should the current equity market risk-on environment persist. However, it would be important that the euro currency not strengthen significantly from current levels for the above scenario to play out to its fullest.
In the US, the Trump administration has continued to struggle to gain a foothold in passing any meaningful legislation. We do continue to believe that President Trump will succeed at reducing tax rates for corporations and individuals but the process will continue to be elongated by the lack of government revenue offsets to the proposed reduction in corporation and personal taxes.
As we enter the final three months of the year, there has been an increase in geo-political risks, which have had a limited impact on equity markets thus far, but we believe investors should be cognisant of these risks. The situation in North Korea remains uncertain given the sabre rattling coming from the country’s leader and the US President. In Spain and Iraq, recent referenda that took place in Catalonia and Kurdistan may have a destabilising influence in each respective country.
Across Europe, except for Britain and now Spain, the initial political concerns that were present at the beginning of 2017 have subsided. The German election which returned Angela Merkel to power is also positive development for the region, despite the makeup of the German parliament still being unknown coupled with the German leader’s somewhat weakened position.
Turning to China, it has been a solid year so far for the world’s second largest economy. Steps taken by the government to provide a soft landing appear to have worked and recent economic data has shown continued expansion of the economy at what is still considered a very rapid rate by developed market standards.
Our view for commodities is largely unchanged from earlier in the year, except for gold, which we believe may have peaked in the near term. We continue to believe that oil prices bottomed out at $45 per barrel earlier in the year and prices have recently rallied to over $50 for WTI and approaching $60 for Brent. Global demand for oil has been stronger than many market participants expected while supply growth has been in-line with expectations, leading to a decline in global inventories. This positive backdrop for oil prices looks set to be sustained over the coming quarter while the outlook for 2018 will be determined by OPEC’s decision whether to extend their production cuts.
We are less optimistic in our view for copper and iron ore prices, where we think the recent price strength was driven by speculators as opposed to a significant shift in global supply and demand for the commodities. In the current risk on environment, gold prices are likely to remain below $1,300 but the commodity has performed well in 2017, increasing by 12%.
Our view for equities remains constructive on a stock specific basis but in aggregate, the current US rally remains quite mature and has been driven by a very narrow selection of large market capitalisation technology companies in addition to semiconductor stocks, which despite their inherent cyclicality, are currently trading at multi-year highs.
We believe US banks will continue to perform well as the economy nears full employment coupled with modest increases in interest rates over the next year. We continue to believe that the energy sector is poised to perform well and build upon the gains achieved towards the end of Q3.
We also think that Europe can continue to outperform the US on a relative basis during the final quarter of the year if there is not a significant strengthening of the euro currency from current levels.
Our top Irish stock picks for Q4 are Bank of Ireland, CRH, Glanbia, Aryzta and Greencore.
See Link Below
Q4 2017 Investment Strategy
Darren McKinley, CFA