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Equity market monthly: In 2018, equities still have room to grow

Equity market monthly: In 2018, equities still have room to grow

Insight

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06 December 2017

Key points:

  • Global equity markets gained 1.8% over the month with the US (+2.8%) and Japan (+1.4%) leading the pack, while at a sector level consumer stocks outperformed. The legislative progress on the US tax reform was the main driver of US performance, with a notable rotation in sectors and styles.
  • Elevated valuations and a slowdown in earnings momentum should translate into lower equity performance going forward. In the US, consensus earnings growth expectations do not appear to entirely price in the potential boost from the corporate tax reform and we expect corporate share buybacks to remain be the largest source of equity demand.
  • Our central scenario is that price returns will lag earnings growth in 2018, allowing for a soft landing in valuation multiples. We expect global equities to return 5-10%, with a positive bias for emerging markets (EM) and the Euro area in our global asset allocation framework.

EM equities take a breather, while US tax reform drives rotation

Regional equity performance was mixed in November with the UK (-2.2%), Euro area (-2.1%) and EM (-0.9%) underperforming. The United States (+2.8%) and Japan (+1.4%) were the top performers, while Swiss equites (+0.6%) rose slightly (Exhibit 1). On the sector front, consumer stocks led returns, with global staples and discretionary sectors both gaining more than 3% over the month while the technology (+0.8%) and commodity sectors lagged the benchmark (Exhibit 2). The legislative progress on the US tax reform was the main driver of US performance, with notable rotations into domestically focused sectors with higher effective tax rates and from growth into value. November also saw some unwind in technology sector and emerging market positioning which have been amongst the best trades in 2017.

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