Equity Markets: The Show Goes On

There is no doubt that the star performers during the first half of 2017 were emerging markets, with its ETF (IEMA) up 18% in the first six months. The US and Europe also generated positive returns with the S&P 500 and the Euro Stoxx 600 returning 10% and 8% respectively over the same period.

A low interest rate environment, strong economic data, reduced political uncertainty, pro-growth central bank policies, positive earnings seasons and improved outlooks are the main reasons for the outperformance we saw in this asset class so far this year.

So which regions are expected to continue benefitting the second half of 2017?

Emerging Markets

The concern that emerging markets are slowing down and will send the world into a global recession did not occur. On the contrary, Brazil and Russia moved out of a recession and China’s real GDP is expected to remain above the 6% level in the foreseeable future. 

Most importantly, China did not disrupt economic growth elsewhere. In fact emerging markets are amongst the top performers so far this year and I expect this outperformance to continue in the second half of the year.

US Stocks

There is no question that ever since the election of President Donald Trump, with his pro-business agenda, there has been a surge of optimism among businesses both small and large, which has fuelled a corresponding surge in the stock market and the value of the US dollar.

However, in the second quarter of the year, the Dollar lost all of its gains against the Euro after Trump was facing an uphill battle in finding enough votes to pass a bill on healthcare reforms as senators opposed the updated measures, putting doubt on whether his other policies will be approved.

Having already returned 10% to shareholders in the first six months of the year, US stocks need further positive catalysts in order to continue rallying, something I find hard but not impossible to see in the second half of the year. 

If Trump manages to pass the bills related to lighter regulation across industries and the lowering of corporate taxes, US stocks will continue to outperform other markets. 

European stocks

I started the year with the opinion that European equities will have a great year in 2017 and I continue to maintain this view. 

Reason being, I expect economic data from the European region to continue coming out strong and for companies to continue to report favourable results and an improvement in future guidance. Most importantly, from a valuation perspective, I believe European stocks are attractively priced.

Which stocks to do expect to outperform the market in H217?

Societe Generale (GLE) EUR

Societe Generale is trading on a P/E of 11x. Given our positive outlook on the European economy and potential for interest rate hikes sooner rather than later, I believe this company should be trading on a higher multiple. 

Ryanair (RYA) EUR

Ryanair remains the best-in-class airline in terms of unit costs, profitability, cash generation and cash return to shareholders. With consensus earnings per share expected to come in at €1.26 in 2018 and using a PE multiple of 16x, we expect the price of Ryanair shares to move upwards. 

Renault SA (RNO) EUR

Renault is a well-positioned in the industry, part of the biggest Alliance of the world with Nissan. Renault’s 2022 targets are likely to be reached two years earlier. Renault is trading at 6x earnings, Renault would typically trade between 8x and 9x earnings had these allegations been removed.  

Amazon (AMZN) USD

Amazon is the leading e-commerce retailer worldwide. Additionally, the overall e-commerce pie continues to grow, as smartphone penetration, digital content, flash sales, and increased internet penetration are collectively accelerating the shift from traditional retail to online. 

Home Depot (HD) USD

Home Depot has a strong growth trajectory given a solid macro tailwind and we believe the company can achieve meaningful gross margin upside. Along with favorable industry dynamics, HD is the market leader in the space on sales, sales growth and profitability.

Mastercard (MA) USD

Our analysis of core fundamentals supporting the underlying drivers of MA’s growth and profitability suggests further outperformance given what remains a resilient global spending environment, along with continued secular growth trends.

Despite equity markets rallying strongly, I believe that there is still value out there. A well-diversified portfolio, which is focused on sectors which are expected to outperform in the current environment, should continue to reap rewards from the equity market.  

My view is that the rally in the equity markets will continue, it is currently a bull market and in my opinion any weakness is still a buy!

 

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd. is one of Malta’s leading financial services firm. The company offers a wide range of investment services including independent investment advice, live online trading, savings plans, investment management and fund services. For more information visit www.cc.com.mt.

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