Saturday 21 April 2018

Are stock markets flashing red, or is there more to go?

Traders work on the floor of the New York Stock Exchange.
Traders work on the floor of the New York Stock Exchange.
Thomas Molloy

Thomas Molloy

AS THE stock market rally enters its sixth year, a new survey has found that Irish investors are increasingly looking at shares to get a return on their cash.

The latest RaboDirect investor barometer found that Irish investors were more confident about the prospects for the global economy, with 53 per cent indicating a preference for investing in equities. Killian Nolan, RaboDirect investment manager, said the optimism was leading to slightly higher risk appetites.

Miserable deposit rates are also having an effect. Average deposit accounts pay just over 2 per cent interest, according to Central Bank figures.

Despite the interest in shares, wealth managers say the rally of the last five years has left many wondering if they had left it too late to join the party. "We're getting lots of inquiries from people looking to try and improve their return and take a little bit of risk," said Brian Weber, investment director at Quilter. "But they're worried they have left it too late with everyone chasing equities right now."

So is it too late?

Ireland

Anyone who invested in the index of Irish shares back in 2009 has made a killing. The Irish Stock Exchange Overall Index is up over 160 per cent in the last five years and is currently trading close to its highs for the period.

After such a meteoric rise it's understandable that investors, many of whom lost their shirts during the crash, now approach the market with caution. However, market analysts say Irish shares should continue to push on.

"Our view on the equity markets generally is that they have further to go and that the Irish market will be dragged along," said Bernard Swords, chief investment officer with Goodbody Stockbrokers.

Swords believes that the turnaround in the construction cycle should help the likes of building supplies group CRH while food companies such as Kerry, Glanbia and Aryzta should benefit from continued growth in profits. He also tipped Bank of Ireland as well as the real estate investment trusts (REITs) to push higher through the rest of 2014.

"In general, if you take the accumulation of the Irish companies, they should do as well, if not a bit better than international markets," he said.

UK

In the UK, the FTSE 100 Index of the 100 largest companies is up almost 90 per cent since its lows in March 2009. Experts predict the upward trend will continue, albeit more slowly.

"The macro environment is good so we're overweight UK shares for the next six to nine months," said Frances Hudson, Global Thematic Strategist with Standard Life Investments. Hudson said that an improving domestic economy and improvement in overseas orders should feed through to a strong earnings growth for a wider range of companies. She added, however, that the fund managers she talks to say there are now fewer buy candidates in the market saying "it's not as easy to identify clear winners as it has been."

In Swords' view, talk of a possible increase in UK interest rates later in the year may begin to impact the market. "The Bank of England may have to withdraw the extreme monetary measures and we could see chatter about interest rates going up in the UK," he said.

US

In the US, the stock market rally has been one of the biggest and longest in history.

The S&P 500 Index which is made up of the 500 largest US companies is up 170 per cent since its low in March 2009 while the Dow Jones Industrial Average is up 150 per cent. Both are currently trading close to all-time record highs.

"It's fair to say that US markets are fairly valued," said Kevin Coughlan, head of JP Morgan's Irish business. According to Coughlan, the current focus for US equities is on earnings saying "if earnings come through and there is improved economic growth, then there's still the potential for further upside".

Standard Life Investments still favours US equities, with Hudson pointing to the fact that the Federal Reserve's tapering of economic stimulus has, so far, been accepted well by the stock market with no major ill-effects.

She warned, however, that the valuations of certain sectors were giving cause for concern. "You have a potential bubble in some of the technology stocks, particularly social media stocks and these have been a very strong driver of US equity markets."

Europe

Problems in the eurozone meant that European shares have lagged behind some of their developed counterparts. However, the eurozone's blue-chip Euro STOXX 50 index is still up over 75 per cent since 2009.

"Overall on Europe we're neutral," said Hudson. "The macroeconomic picture is a little more worrying with perhaps the prospect of deflation and what kind of policy response that elicits from the ECB."

Coughlan agreed that the actions of the ECB will be important in determining the future direction of European markets. "There has been a lot of rhetoric but not a lot of policy," he said. "But we may be approaching a phase where we see more aggressive monetary policy action from the ECB and that could make a big difference."

According to Weber, European stock markets could be set for good gains. "We think Europe has the potential to surprise on the upside and could be set to outperform the US," adding that compared to the US, the valuations of European stocks are lower and the margins they are trading at are also lower.

Japan

The Japanese stock market had its best performance for 41 years last year, rising 57 per cent, according to data provider Bloomberg.

The rebound is widely seen as due to Prime Minister Shinzo Abe's policies of fiscal stimulus, monetary easing and structural reforms – so-called 'Abenomics'.

The story of 2014 has been markedly different with signs that the share rally has stalled. The Nikkei Index of Japanese shares fell by eight per cent in the first three months of the year.

"I suspect the easy money has already been made in Japan so it's a much more nuanced opportunity now," said Coughlan, adding that despite the recent dip in Japanese equities, for those who have faith in the story, now may be an attractive entry point. "Japan needs to show progress on structural reforms," he said

According to Weber, the short-term prospects for Japan may be positive "but there are long-term structural problems such as the country's demographics which present challenges".

Ian Quigley, director of investment strategy with Investec Wealth and Investment, believes the risk-reward ratio for investing in Japan remains positive.

"We still think Japanese stocks are attractively valued," he said, adding that on a price to book basis, the Japanese market was trading at about half the value it should be historically.

In Quigley's view, despite the weakness in the market over the last few months, the government is still stimulating the economy fiscally and monetarily which should support Japanese share values.

Emerging markets

The majority of regional and country MSCI Emerging Markets Indices lost ground in 2013 while the MSCI Emerging Index as a whole was down 6 per cent. "If developed markets had a good 2013, it was a poor year for emerging markets," said Coughlan.

The sell-off continued into 2014, but for those with an eye on the long term, current valuations of emerging market indices represent an attractive entry point.

According to Coughlan, emerging market equities are cheap "by almost any measure" and present "huge opportunities" for upside in the next 12 months. He said, however, that emerging market investors "have to go in expecting a certain amount of volatility". The question emerging market investors have to ask themselves, says Coughlan, is: "Does the long-term case for emerging markets remain?"

The case for emerging markets is echoed by others within the asset management industry. "We have been cautious on emerging markets for a while but there are some signs of stabilisation there," said Quigley. "Sentiment may be poor but on valuation metrics, they're looking more attractive than they have been for some time so for value investors, it's probably not a bad time to consider looking at them. Emerging markets actually had profit growth last year," said Weber. "Obviously, there are fears about China, and those fears ran into the rest of the sector, but if they continue to deliver profit growth, it's hard to see that they can continue to de-rate."

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