US
The US market has led the world in recent years but this year, as in other regions, the main challenge is that company profit growth has come to a halt. To a large extent this reflects the impact on foreign earnings of the rise in the US dollar and also the collapse in the oil price and its effect on oil-related companies. These effects should lessen in 2016 and profit growth should resume, albeit at a modest pace. In this time of heightened uncertainty the US market remains relatively low-risk, in spite of valuation levels that are not obviously cheap.
Europe
Europe’s recovery since 2009 has been disappointing versus the US but the recent oil and currency moves should be helpful, though economic growth may still not be strong enough to see a major recovery in the more cyclical parts of the market, which, however, are attractively valued on a longer-term view.
Asia Pacific inc. Japan
Outside Japan, Asia has been disappointing in performance terms as well as in the development of the background conditions for company profits this year. On a longer-term view, Asian markets offer interesting value based on measures such as price-to-book ratio but the continuing downgrading of earnings expectations is likely to restrict the upside in the shorter term. In contrast, Japanese companies are on track to deliver around 15 per cent earnings growth in 2015 and solid further growth in 2016.
Emerging markets/China
Much has been written recently about the plight of emerging markets. It is clear that growth rates in China have come down and that the rebalancing of the economy away from fixed asset investment and towards consumer services is a negative for China’s trading partners. Encouragingly, the Chinese domestic stockmarket, which was in bubble territory, has now corrected. Looking ahead, we need to be vigilant to the feedback from weak currencies in countries such as Brazil, Russia and Indonesia. It is too early to turn very positive.
James Davidson
Global equity income manager, JPMorgan Asset Management
UK
As income investors we look at the dividend yield on the FTSE, currently twice that of the S&P 500. The market became investable again following the election, while solid wage growth and continued economic growth have helped our equities to perform strongly. Holdings that we favour include Berkeley Homes and Direct Line, both yielding around 6 per cent. More recently, we have taken some profits, as some of the more cyclical holdings in media and hospitality are exposed to sterling’s strength, and emerging market woes are expected to impact the UK more than some other economies.
