John Bennett, Head of European Equities at Janus Henderson, gives his views on what investors should be considering in 2018, discussing the implications of the current macro environment on European equities.
What should investors consider for 2018 in European equities?
I think if investors are considering European equities this year relative to other asset classes and relative to other geographies they should ask themselves the question, is it going to be more of the same? I find myself asking that. In other words, are equity markets going to be led by what has worked, not just for 2017, but for the last ten years – growth stocks and low volatility quality stocks? Or is that leadership going to be challenged?
If it’s going to be challenged - and what I mean by that is, if value has a better chance of mean reverting positively versus growth, then that would have big implications for geographic asset allocation. In other words, Europe and probably Japan could outperform the US. I thought that would happen in 2017. It did not.
So I think the big question you have to ask yourself, before considering European equities, is: what shape are global markets going to be? Are they going to be dominated by the same old growth stocks, or is value going to come to the fore? That, in turn, requires a change in the shape of the bond yield curve in my view.
What part will the macro environment play in European equities?
I have long been on record as saying that GDP growth has no correlation at all with stock market growth, at least in the short-term. By that, I mean one, two or three years. That being said, I don’t think that European GDP, if we call that the macro, is going to be anything other than benign.
That being said, it is important to consider the synchronised global growth that we see at the moment. We might look back in Q2 or Q3 of 2018 and say “Q1 was as good as it got”, because economies are humming. They’re doing well, and some parts of Europe are surprising people very positively on the upside. We have synchronised global growth and I think that this is as good as it gets in a GDP sense, and therefore it is probably as good as it gets for certain cyclicals.