Views and Ideas

A year 2018 as good as 2017 ?

23 January 2018

The macroeconomic environment expected for 2018 offers significant support for global equity markets and suggests another strong performance after an excellent 2017.

Synchronized global growth of 4% will back corporate activity and margins. As such, earnings per share are expected to be up by 10%, synchronized among the geographic regions.

Over and above the accelerated global activity, earnings per share should rise in the United States thanks to the increase in household disposable income and the finalization of the tax reform by the authorities. This profit growth should at least partially offset the American monetary policy normalization started by the Fed

The profits of European companies, and more particularly of those in the Eurozone, should increase by more than 10% thanks to the acceleration in activity and to the Eurozone’s positive reaction to growth in emerging countries.

Nevertheless, we must pay special attention to:

  • shifts induced by the digitalization of the economy, which, once detected, can affect an entire sector.
  • the risk associated with a strong Euro for European export companies.

We still believe that the growth sectors should attract investors, although we could record ‘technical’ and occasional rebounds in sectors with low valuations.

The visible growth in industrial production will support investments that have not lived up to expectations in 2017, with the usual lag of 12 to 18 months. That is why the growth differentials between the sectors must be significant, with a preference for technological and industrial stocks.

We give priority to companies who have committed to a sustained investment policy with a profitability that far exceeds the cost of capital.

Beyond this scenario, what are the main risks?

In addition to geopolitical tensions (Korea, Iran, Donald Trump’s foreign policy, etc.), special attention should be paid to the normalization of the main central banks’ monetary policies, and in particular the drop in cash flow from 2018. The hike in interest rates will increase credit conditions and probably generate more volatility in the markets. These tensions will naturally highlight the historically high absolute valuation of risky assets classes. In the portfolios, we will also take care to monitor foreign exchange risks that materially affect the relative performance of the markets.

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