Looking globally in 2018

Jeremy Podger
Jeremy Podger
Portfolio Manager, Fidelity Global Special Situations Fund12 January 2018

In 2017, global equities were well supported by global earnings growth after years of stagnant corporate profits in US dollar terms. 2018 needs further profit growth to support equities, and at the moment the market does expect that to come through. I think there is a good chance we will see this profit growth, albeit at slower rates than we saw in 2017.

There is a lot of scope for surprise in 2018. One of the most surprising things about 2017 was how calm markets were and how they trended up gently.

This year, we could see more geopolitical uncertainty with a larger effect on markets than this year, but the nature and intricacies of such uncertainty are very difficult to predict.

The market could also be surprised by rising inflation. At the moment, inflationary pressures do appear under control but that could change if economies start to run too hot.

Regionally, Japanese equities are still well below the levels of the late 1990s, but in 2017 they reached a 25-year high. Earnings growth in Japan is expected to reach 20% in 2017, but consensus forecasts that rate to slow sharply in 2018, although it is still expected to remain in positive territory. I think there is potential for Japanese profits to surprise investors on the upside in 2018, resulting in another leg up in that market.

In 2017, most of the good new opportunities were outside of the US, and so I have been tilting the balance a little towards other regions.

In 2018 I will be concentrating on three disciplines:

  • Corporate change - this is where businesses undergo change through corporate events such as restructuring, mergers and acquisitions (M&A) and spin-offs. M&A activity should still remain fairly vibrant in 2018.
  • Exceptional value opportunities - this is the ability to drive share re-ratings through delivering earnings growth in excess of market expectations. We have seen particularly interesting opportunities in emerging markets and Japan recently.
  • Franchise and growth companies - these are businesses with a dominant position, strong growth and cash flow, and pricing power. The technology sector has provided opportunities recently and I continue to favour it, but in 2018 we could see more opportunities in the second-line of tech stocks, rather than the headline-grabbing big caps where risk could be rising.

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