After what was a volatile year for equity markets around the globe, what are the prospects for global stocks in 2019?
Here, a selection of fund managers give their top sectors to look out over the next 12 months.
Europe – Chris Hiorns, portfolio manager of the EdenTree Amity European fund
The European economy remains in a much better place than it has been for much of the last decade, and recent weakness in the automotive sector, caused by the introduction of new emissions controls, should only be temporary.
Moving into 2019, we are positive on cyclical stocks trading on low valuations across a broad range of sectors; from tyre manufacturer Michelin, building materials company Saint-Gobain, recruitment specialist Randstad, packaging company Smurfit Kappa and industrial minerals company Imerys.
We are also positive on the financial services sector, which sold off heavily despite an improved regulatory outlook and stronger capital position. In 2019, it should continue to benefit from strengthening in the European economy and improved investor confidence.
Europe – Ken Wotton, manager of LF Gresham House UK Micro Cap and Multi Cap Income Fund
We expect continued uncertainty and volatility going into 2019, not least due to Brexit.
Typically, where there is volatility, there is also opportunity. While large-cap businesses are generally impacted by macro factors, the agility and niche positioning of smaller companies may allow them to react positively to broader economic headwinds.
As political noise increases, we expect sentiment to become more fragile. Companies we have followed for years are increasingly at attractive valuations. While there may be short-term volatility, we are long-term investors. We invest in companies with strong management and robust business models that can perform over the longer term.
One such example is Impax, a specialist investment manager focused on environmental and sustainability strategies. There is a growing trend for asset allocators to increase exposure to these themes, which should drive asset flows for Impax for a number of years.
In addition, the recent Pax World acquisition gives the group critical mass and distribution in the important US market.
Impax has a business model with strong operational leverage that drives profit margins, cash generation and dividend growth as assets under management scale.
Japan – Joël Le Saux, manager of the OYSTER Japan Opportunities fund
Underlying domestic economic conditions in Japan, such as core wage growth and business fundamentals, are encouraging. The Japanese market is also becoming much less cyclical. With less cyclicality, market volatility has diminished relatively – an attractive proposition for the long run.
However, while most companies have strong balance sheets, they still need to improve shareholder payouts. This creates opportunity for price discovery and optionality in a range of stocks.
Growth investing has clearly fatigued in Japan. Today's historically low valuations mean we are seeing compelling opportunities, particularly within domestically-geared mid-caps.
Trying to time the market does not pay in a nuanced Japanese market – which is why we take a blended approach.
This means being cognisant of diverging valuations, while unearthing idiosyncratic opportunities and avoiding the disruptive impact of market style rotation.
Latin America – Verena Wachnitz, portfolio manager of the T. Rowe Price Latin American Equity fund
While Latin America is inherently regarded as one huge region, in reality it is a mosaic of countries often at very different stages of the growth cycle.
For example, Brazil is only just emerging from a deep recession and starting to grow again, while inflation is under greater control, interest rates are at multi-decade lows and the current account has narrowed significantly.
Elsewhere, countries such as Chile, Peru and Colombia have addressed past credit imbalances to some extent and are on a much better trajectory. Meanwhile, Mexico is much later in its growth cycle given its proximity and trade links to the US.
In Latin America, political and economic uncertainties have caused significant headwinds for many markets, creating attractive valuations.
Overall, with Latin America having been flat over the past five years, at a time when the S&P 500 has delivered a total return of more than 100%, valuations are reasonably attractive.
China – Angus Chiang, portfolio manager at Trium Capital
History does not repeat itself, but it often rhymes. At the beginning of the century, when China was faced with the challenge of opening its economy to world trade, it embarked on a series of economic reforms. At the time, the US was at the height of the dot-com bubble.
Fast forward to now, with a looming trade war, China is embracing another round of reforms – upgrading domestic industries, assisting small and medium-sized enterprises and sophisticating domestic capital markets.
By contrast, continued US economic expansion is far from certain, yet valuations are at a decade high.
The year 2000 remains the only year in recent history where the Chinese stock market rose substantially, while the rest of world suffered a significant decline. Four years later, the Shanghai Composite Index was still cumulatively positive, while the S&P 500 remained negative.
If I am to invest today, I know where I will put my money.
Korea – Jacob Mitchell, chief investment officer Antipodes Global Investment Partners
South Korean opportunities such as KT, KB Financial, Hyundai and Samsung are very cheap. The market narrative is highly reminiscent of Japan during the period of persistent yen strength and investor neglect in 2010-2012.
Macro generalisations – including government policy stasis, poor corporate governance and high exposure to China – are drowning out the stock-specific discussion.
Set against a backdrop of President Moon Jae-in driving government and corporate reform, generational wealth transfers at the large chaebols are driving higher shareholder returns via buy-backs and rising dividend payouts.
While many view Korea as the Bermuda Triangle of value investing, we have typically found this type of market highly prospective for absolute returns.
India – Simon Finch, co-manager of the Ashburton Chindia Equity fund
Heading into 2019, India remains one of the most attractive investment destinations, given its reform-minded government and favourable long-term characteristics – including demographics, the urbanisation shift and important levels of disposable income.
Moreover, the Indian capital market environment is mature and well-established and corporates strongly adhere to good governance practices.
Turning to the national election, set for April or May, the best-case scenario would be another strong mandate for Prime Minister Narendra Modi. The worst case, which we believe has a low probability of occurring, would be if Modi's Bharatiya Janata Party loses and a 'third front', or alliance of smaller parties, is formed, as this would likely result in fresh elections within 24 months.
However, the incoming government has almost always sought to build upon the progress of the previous one. Therefore, so as long as a third front is avoided, we remain confident the government will continue to operate in a manner that puts India first, creating jobs and seeking to drive growth and investment.
Frontier markets – Oliver Bell, portfolio manager of the T. Rowe Price Frontier Markets Equity fund
Frontier markets are making meaningful economic and political improvements and the recent index reclassification cycle is testament to the potential of these countries.
Kuwait's progressive stock market reforms has seen it admitted to the FTSE Russell Emerging Markets Index and on the watchlist for MSCI's reclassification in 2019.
Vietnam, which is being considered for an index upgrade by FTSE Russell, is steadily growing exports to levels consistent with many developed economies.
Which markets are poised take a leading role in the next phase of frontier growth? We are currently witnessing many encouraging developments in a number of outposts, including the established markets of Vietnam, Kenya, Sri Lanka, Morocco and Romania.
In addition, we expect the lowly-weighted Nigerian market, which was once a large part of the frontier benchmark, to return to investor favour over the medium term.
US – Jon Cheigh, portfolio manager of the Cohen & Steers Global Real Estate Securities fund
We believe commercial real estate in the US should continue to see improving operating fundamentals amid solid economic growth, steady job creation and monetary conditions that should remain relatively accommodative even as stimulus is gradually withdrawn.
Therefore, we generally favour pro-cyclical real estate sectors able to capitalise on these trends, over the more interest rate-sensitive sectors.
After two years of increasing distress from tenants, shopping centre and mall landlords in the US are seeing an improving, albeit still weak, outlook.
Some national chain retailers have been producing more stable sales in physical stores and we expect the pace of store closures and bankruptcies to decelerate. This will directly benefit landlords.
As a result of this inflection, coupled with very cheap valuations, we have moved to a slight overweight in shopping centres, while we remain underweight malls.
Ultimately, the secular headwind of e-commerce penetration remains, but the operating fundamentals of retail landlords should fluctuate as they respond to the changing market.
With the UK economic and market narrative having again been dominated by Brexit in 2018, it may be topical to consider the world beyond the British Isles.
With the UK economic and market narrative having again been dominated by Brexit in 2018, it may be topical to consider the world beyond the British Isles. After what was a volatile year for equity markets...