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INVESTMENT OUTLOOK

October

2018

“ Tax cuts have boosted earnings, reduced valuations and extended the bull run. We are still late cycle, however, so balance and diversification are key”

By Tom Stevenson, Investment Director

In this issue: ■ Longest bull market continues

■ Emerging markets: crisis or opportunity?

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Important information: Please be aware that past performance is not a reliable indicator of future returns. The value of investments and the income from them can go down as well as up, so you may not get back what you invest. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in small and emerging markets can be more volatile than those in other overseas markets. Reference to specific securities or funds should not be construed as a recommendation to buy or sell these securities or funds and is included for the purposes of illustration only. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.

Outlook at a glance

Please note the views in this document should not be seen as investment advice. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.

Asset classes

Current View

3 Month Change

Equities Tax cuts have prolonged the cycle in the US, while other markets are attractively valued. Equities are still the place to be.

Bonds Yields are headed higher but at a glacial pace. Bonds can therefore continue to provide diversification benefits and some income.

Property q The balance between risk and reward in commercial real estate is no longer favourable. Finding a sustainable and reliable income is too hard now.

Commodities Some commodities exposure can help balance a portfolio and the asset class tends to do well at this ‘overheat’ end of the cycle.

Cash Cash becomes more attractive in its own right as interest rates rise. In the meantime, it provides dry powder in the event of volatility.

Equity regions

Current View

3 Month Change

US Tax cuts have taken the edge off the US’s previously high valuations. In an uncertain world, America is the favoured port in the storm.

UK Investing in the UK is all about international exposure and income. Domestic stocks are unattractive while Brexit remains unresolved.

Europe Valuations are reasonable and growth continues but trade wars cast a shadow over a region that depends so much on exports.

Asia Pacific ex-Japan This is a contrarian call that may be too early. But this summer’s falls make

Asian and emerging market equities look good value.

Japan The best risk and reward balance of all the equity regions. Decent growth prospects are not accurately reflected in Japan’s cheap stock market.

Current View: Positive Neutral Negative

3 Month Change (since the last Investment Outlook): Upgrade Unchanged Downgrade

For more market data including full 5 year performance figures see page 10

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Acknowledgements I would like to thank the many knowledgeable and experienced people within the wider Fidelity organisation who have helped me develop the ideas in this Investment Outlook. Although the views expressed here do not represent the shared opinion, or house view, of Fidelity’s investment team, the combined expertise of over 380 investment professionals in 13 countries is a very significant resource on which I have been able to lean. In particular, I would like to thank Gary Monaghan, Investment Director in Hong Kong, Jeremy Osborne, Investment Director in Tokyo, Leigh Himsworth, UK Portfolio Manager, Neil Cable, Head of Real Estate, Curtis Evans, Head of Investment Directing, European Fixed Income, Kasia Kiladis, Investment Director, US, Rebecca McVittie, Investment Director, Emerging Markets, Natalie Briggs, Investment Director, Europe.

What we were watching this summer

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.51985

Treasury yield

1990 1995 2000 2005 2010 2015

Source: Thomson Reuters Datastream, as at 15.8.18. Percentage points difference between US 10yr Treasury Bond Yield and US 2yr Treasury Bond Yield.

120

S&P 500 Composite China CSI 300

115

110

105

100

95

80

85

90

2017 2018Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Source: Thomson Reuters Datastream, total returns in local currency, figures rebased to 100.

120

MSCI EM $US US Dollar

115

110

105

100

95

90

2017 2018Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Source: Thomson Reuters Datastream, as at 7.9.18, total returns in local currency. Figures rebased to 100.

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of an investment. Investments in emerging markets can be more volatile than other more developed markets. For full 5 year performance figures please see page 10.

Investors think the Fed will change its tuneThe chart here is a simple way of understanding one of investment’s hottest topics right now – the yield curve. When people talk in nervous tones about an ‘inverted yield curve’ they mean that the yield on short bonds (which is closely linked to interest rates) is higher than that on long bonds (which is driven by growth and inflation expectations). This is a worry because it means central banks may be tightening policy too quickly and risking pushing the economy into recession. The line here shows the 10-year yield minus the 2-year equivalent. As is clear, it fell below zero (inverted curve) on a handful of occasions in the past 30 years – all of them were associated with recessions and market downturns. We are still above zero today – but not by much.

Markets don’t always move in lockstepAs globalisation took hold over the past 30 years, we have become used to markets moving in tandem, with the US often taking the lead and others following close behind. It’s sometimes said that when Wall Street sneezes, we all catch a cold. This year has seen a clear breakdown of that synchronicity as the S&P 500 and Nasdaq have powered to new all-time highs while many other markets have gone the other way. As the chart shows, the most dramatic example of this divergence has been between the US and China. In part this reflects the boost to the US economy from Donald Trump’s tax cuts. This in turn has given the US administration the power to weaponise trade policy – trade wars are worse news for America’s trading partners than the US. In the case of China, however, this is not the whole story. Beijing’s attempts to rein in credit were having a damaging impact on shares in Shanghai and Shenzhen well before trade tensions increased in the spring.

Emerging markets hate a rising dollarThe relationship between different assets comes and goes. Correlations, to use the jargon, can be unpredictable. However, one that tends to be reliable is the fact that a rising dollar is bad news for emerging markets. The reasons are not complicated. If the value of the US currency is rising, there is less incentive for investors to seek returns overseas. This is particularly the case if the dollar is appreciating on the back of rising US interest rates. When the dollar is strong against other currencies it also becomes more difficult for overseas borrowers to service their debts. With many emerging market countries and companies tending to hold dollar-denominated borrowings, they are vulnerable when the greenback strengthens. As the chart shows, this inverse relationship has been notable this year. Turkey and Argentina have been in the spotlight but the problem is more widespread, with the rupee, rouble and rand all under pressure and equities following currencies lower.

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Asset classes

EQUITIES

S&P 500: duration of rally in days

1949-1956

4,000

Days

3,000

2,000

1,000

01974-1980 1990-2000 2009-2018

Source: Thomson Reuters Datastream, as at 7.9.18, total returns in local currency.

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.

It doesn’t make much sense to talk about equities as a single investment class at the moment. Shares often move together but this year has seen significant divergence between different markets. Wall Street is hitting new highs while China and other emerging markets are deep in bear territory. However, to the extent that we can take the US market as a proxy for global equities (it is after all half of the total market capitalisation), we can make some observations.

First, as of late August the current bull market is now classified as the longest ever. Its duration now exceeds that of the 1990-2000 bull run that ended with the bursting of the dot.com bubble. This rally is therefore long in the tooth and that worries some investors, although not me.

The main reason I am relaxed about the length of the bull market is that it says nothing meaningful about the likelihood

of it ending. A bull market as unloved as this one can go on for a long time because it is shallow and has not yet resulted in excessively stretched valuations. Far from it. Secondly, I think you can argue that a 10-year rally is not even that long in historical terms. It is quite reasonable to make the case that the period from 1982 to 2000 was actually one long bull run, punctuated by a couple of savage corrections, in 1987 and 1990. In that context, today’s rally is not really that unusual.

One of three things will end the bull market. The first would be excessive zeal from the Federal Reserve, tightening monetary policy too fast and sending the economy into recession. This is possible, and Jay Powell does seem determined to normalise policy even if that causes some pain. But I don’t see it as a central worry.

Second, valuations could go too far, resulting in the bull market collapsing under its own weight. This also looks a long way off thanks to the earnings boost provided by Donald Trump’s tax cuts. Valuations are actually cheaper than they were at the start of the year, even in the markets that have gone up (and plenty have not).

Finally, the bull market could be killed off by some unexpected geo-political disaster. As this is by its nature unpredictable there is no point in worrying too much about it.

In summary, shares are reasonably valued, offer growth and often better income than the alternatives, are supported by economic growth and are not likely to be undermined in the foreseeable future by any of the usual bear market triggers – valuation, sentiment, inflation, interest rates. Protect yourself with diversification – and stick with it.

PROPERTY

We have been describing real estate as ‘late cycle’ for a very long time now. And still it continues. Pricing in most markets can charitably be described as full. In some prime European markets, investors are willing to accept income yields as low as 2.5%. If you consider that this means a 40-year pay back, you might reasonably think twice. Would you buy a share on 40 times earnings?

Another way of looking at the property market is to compare that 2.5% yield with the estimated 2% cost of depreciation and obsolescence on a building. Property is after all a depreciating asset, something that people tend to forget in a rising market. When you also consider that an investor should be paid something to compensate them for the illiquidity of property, it is clear that many investors are taking a very long view indeed.

To make a sensible purchase in today’s environment you really need to go off piste, be very well-connected and know who to approach with a deal. The best investors are still able to find attractive deals at 5-6%, perhaps because they are willing to take a view on their ability to re-let an expiring lease, but it’s becoming much harder work.

One sector looks particularly vulnerable. If even a star performer like UK clothes retailer Next admits that it is struggling to make the ‘bricks and clicks’ model work, then we may finally have reached the tipping point where online shopping kills the high street. In this new world, retail property may come to be viewed like industrial sites used to be – requiring a higher yield and, even then, perhaps representing a value trap.

The counter argument is that investors are proving much less flighty than expected. They are not treating property investment as a tactical opportunity but a long-term commitment that can still pay a sustainable income. But the risk/reward balance is a lot less compelling.

Important information: Funds in the property sector invest in property and land. These can be difficult to sell so you may not be able to cash in the investment when you want to. There may be a delay in acting on your instructions to sell your investment. The value of property is generally a matter of a valuer’s opinion rather than fact.

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BONDS

Bond yields no longer rising

4%

3%

2%

1%

0%

-1%

Japan

2017 2018

US Germany UK

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Source: Thomson Reuters Datastream, 5.9.18, 10yr government bond yields.

Past performance is not a reliable indicator of future returns.

As the chart shows, yields on government bonds have risen somewhat on a one-year view (bad for bond prices, which move in the opposite direction) but they have pretty much gone sideways over six months as doubts have set in about the macro-economic and geo-political backdrop. Trade tensions are the key cloud hanging over markets and while the direction of travel for yields is probably higher, the trajectory looks like being very shallow.

Upward pressure is greatest in the US, where rising inflationary pressures, a tight labour market, rising wages and a probable

pick-up in bond issuance to finance a widening budget deficit mean the Fed’s inclination will be to stick with its tightening path throughout 2019. Jay Powell, the Fed chair, wants to build up some ammunition so he can fight the next downturn when it comes. Whether he is able to do so is a moot point – the yield curve suggests he may actually be tightening faster than the market can live with (see page 3).

When it comes to corporate bonds, the gap between the yields they offer and those on safer government bonds is not particularly enticing. The reward for taking the extra default risk is not that great and that means that any slowdown in the current buoyant earnings growth picture could lead to a widening in spreads (and therefore to lower corporate bond prices). The absence of a risk premium is even more pronounced among lower quality companies.

Emerging markets offer much higher yields, but there is a good reason for this. In an environment of rising US interest rates and a stronger dollar, the returns on offer may represent something of a value trap. A lessening in trade tensions, moves to support the Chinese economy and evidence of a more dovish Fed would help.

Important information: There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall..

COMMODITIES

Diverging commodity prices

150

140

130

120

110

100

90

80

Crude Oil Copper

2017 2018

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Source: Thomson Reuters Datastream, 7.9.18, total returns in local currency, rebased to 100.

Past performance is not a reliable indicator of future returns.

Commodity prices have diverged this year as the chart shows. The oil price, which is far and away the most important

global commodity, and so dominates the baskets of resources tracked by the main ETFs, has had a third good year on the trot. Industrial metals, on the other hand, have suffered from a slowing in global activity, notably in China.

With a lack of correlation within the asset class and with other assets too, commodities are a good way of diversifying a portfolio. Like equities, they tend to benefit from an increase in growth but they tend to do so at a slightly different point of the cycle so they can help to smooth out the ups and downs of a portfolio with a high equity content.

When the economy moves into the late cycle, as it is now, risky assets like shares can move in the opposite direction to oil especially as a higher crude price acts as a speed limit for growth, eats into company profit margins and depresses consumer spending. A rising oil price also puts upward pressure on bond yields as inflationary pressures increase, which makes bonds a less good diversifier versus equities at this point.

For these reasons, some exposure to commodities, especially oil can be very welcome in the later stages of the cycle.

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Equities – a regional perspective

US

US economy continues to boom

160

140

120

100

80

60

40

20

Consumer Confidence Index

00 02 04 06 08 10 12 14 16 18

Source: Thomson Reuters Datastream, 15.8.18

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.

At the beginning of the year, the US stock market traded at just over 18 times expected earnings per share. Since then, Wall Street has risen strongly but forecast company earnings have grown even faster. Today, the market is valued at less than 17 times expected earnings. The argument against the US has in recent years been that it is too expensive. It is hard to make that case today.

It is hard to overstate the impact of this year’s tax reforms. If you add together an estimated $700bn of cash being repatriated by American companies which no longer need to avoid high US corporate taxes, $120bn of consumer tax cuts, $80bn of corporate tax cuts and $100bn of new Federal spending, you very quickly get to a very big number. As one report I read recently put it: it’s raining money in the United States.

At the moment, a lot of that money is being used to pay down debt and boost under-funded pension schemes. In time,

however, it will be turned to more shareholder-friendly uses. Capital expenditure will boost productivity and profits, share buybacks increase earnings per share, while anything left over can be used for M&A. The current 4% shareholder yield from dividends and share buybacks might rise to 6%, which will be around twice what an investor can earn from a US Treasury bond. In these circumstances, it is hard to argue against the US stock market.

The chart here shows the ongoing rise in consumer confidence in America. This reflects the fact that income tax has been cut for more than 90% of the population by a total of $120bn, or 0.6% of GDP. The jobs market is booming. Effectively America has been given a 3% pay rise. In due course this will encourage the Federal Reserve to choke off inflationary pressure with higher interest rates but that is probably tomorrow’s problem.

Of course, there are still things to worry about. Top of the list is what is going on in Washington. President Trump is delivering everything he said he would economically but the net is tightening around him politically. Key to his future in the White House will be the mid-term elections. If the Democrats can take control then impeachment might become more than vague speculation. But don’t count on it. A strong economy, delivering higher incomes and jobs, is not one in which America typically turns on its leader.

The US is one of the world’s more defensive markets. It is biased towards the growth stocks that investors shelter behind when the global outlook is unsettled. I expect the S&P 500 will continue rising to 3,000 and beyond. Investors’ enthusiasm for the US market will only be increased by uncertainty in emerging markets and a rising dollar, which increases returns for non-US investors. I have been cautious about the US in recent quarters because it looked expensive against other markets. However, the tax cuts and the trade tensions that a strong US economy has underwritten argue for a continuing bias towards the US.

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JAPAN

Japanese shares becoming cheaper21

20

19

18

17

16

15

14

TOPIX – Price/Earnings Ratio

2017 2018Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Source: Thomson Reuters Datastream, 7.9.18. Price/earnings ratio of TOPIX index.

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.

The 9% fall in Japan’s Topix index from its peak this year is partly a reflection of its strong performance last year but it is also a consequence of an unhelpful, if understandable, shift in investor mood. Japan is more exposed than most countries to the ups and downs of global trade. It stands to lose more than most from the rise of protectionism. The use of the yen as a safe haven in troubled times has not helped as a strengthening currency makes Japan less competitive in global markets.

These factors have hit sentiment hard this year and net purchases of Japanese shares by foreign investors have given back all last year’s inflows and more. I don’t think this is justified by what’s actually happening on the ground. After a bit of a wobble in the first quarter, GDP growth recovered to 1.9% in the second three months of the year, well ahead of expectations. The size of the Japanese economy is now safely above the previous peaks in the late 1990s and just before the financial crisis.

The recovery is broad-based. Companies are spending more on growing capacity and labour-saving equipment to counter

rising wage costs. Consumers, meanwhile, are benefiting from a tight labour market which prompted a 7% rise in bonuses this year. The employment situation has not been better in Japan for decades. This is leading to the strongest wage growth for more than 20 years. At 3.3%, salary rises are double the rate of a year ago. The participation rate is up, as women and older people enter the job market. Finally, there’s a more relaxed attitude to foreign workers in the tightest sectors like healthcare, agriculture and tourism. This is a sea-change in Japanese immigration.

On the corporate front, too, things are looking up. The return on equity at Japan’s famously inefficient companies is twice what it was only five or six years ago and there is scope for further improvement because Japanese companies are sitting on three times as much cash as their US and European counterparts. Company profits have more than doubled since 2012, fuelling a sharp rise in dividends and share buybacks.

So how is this reflected in the valuation of the Japanese stock market? It’s not. The average Japanese share is valued at around 12 times expected earnings today. That compares with around 17 in the US and a bit less in Europe and the rest of Asia. The comparison when it comes to the ratio of share prices to companies’ assets is even more striking. Japan is more than twice as cheap as the US on this measure.

So what might trigger a re-assessment of Japan? First, the re-election of Prime Minister Shinzo Abe as leader of the Liberal Democratic Party later this month. Second, the delivery of double digit earnings growth, making company estimates at the beginning of the year of 2-3% look far too cautious. Third, continuing dollar strength.

There are risks, of course. An escalation of trade tensions would be extremely unhelpful. If Trump turns his attention to Japanese car manufacturers, that would be a game changer. A rising oil price is a danger for one of the world’s biggest energy importers. An emerging market crisis or major slowdown in China could not be shrugged off. But all of this is in the price. We have been positive on Japan for some time. After this year’s weakness, we are even more so.

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ASIA AND EMERGING MARKETS

Turkish lira to US dollar7

6

5

4

3

2

1

Turkish Lira to US $

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Thomson Reuters Datastream, as at 31.8.18.

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may also affect the value of an investment. Investments in emerging markets can be more volatile than other more developed markets.

It is wrong to generalise about emerging markets. The differences between economies are much more significant than the similarities. It makes no more sense to compare India and Russia, say, than it does the US and Japan. But investors always tar the whole investment class with the same brush and never more so than currently.

The MSCI Emerging Markets index has fallen by more than a fifth this year. Even as the US is enjoying record highs for the S&P 500 and Nasdaq, emerging markets are enduring a fully-fledged bear market. Is this justified?

Certainly, there are significant concerns. Largely, these revolve around US monetary tightening and the subsequent rise in the US dollar. This is typically a headwind for emerging markets for two reasons. It encourages capital flight back to the US where investors can receive an increasingly acceptable yield at much less risk than in the developing world. Secondly, a strong dollar makes it harder to service borrowings denominated in the US currency.

The risk is that emerging markets find themselves locked into a downward spiral, as weaker currencies stoke inflation on the back of more expensive imports. This creates a need to raise interest rates which further weakens economic growth and puts downward pressure on the currency. And so the vicious circle goes on.

This summer has seen a couple of extreme examples of this process in action. Argentina and Turkey both have a problem with dollar-denominated debt and a problem with inflation. Argentina has a reform-minded government but it has been slow to make unpopular decisions and finds itself in the arms of the IMF just a year after successfully issuing 100-year bonds. Turkey is in a worse place, with an autocratic leader who for too long refused to bow to international pressure to raise interest rates. The chart shows how the market has responded.

So, a key question for investors is whether we are in the early stages of an emerging markets crisis or simply witnessing an inevitable wobble as the world gets used to tighter financial conditions as the Fed begins to normalise policy. There are a few reasons to hope for the latter. Unlike in the late 1990s when emerging markets had currencies that were pegged to the dollar, had weak current accounts and low foreign exchange reserves, the developing world is more resilient today. Rising US rates need not be a problem anyway if the underlying reason for them is strong growth.

Look beneath the surface, too, and the outlook is not at all bad for a number of emerging markets. India appears to be benefiting from a weakening currency, with growth outstripping even China. The Modi government has pushed through successful reforms including the introduction of a countrywide sales tax. Taiwan’s GDP is growing strongly.

Even in China, where there is evidence that trade tensions and the authorities’ desire to rein in credit growth are crimping discretionary spending, there are as many investors (mainly overseas contrarians) looking for bargains as there are (mainly local) investors running for cover. The Shanghai-Hong Kong Connect is witnessing big inflows into mainland A-shares.

Politics will continue to be a big issue this year. Brazil has an election in October which will indicate how serious the country is about underpinning growth and solving an unsustainable budget deficit.

As ever, this is a stock-picker’s market. China’s consumption story remains intact. In India, some sectors like banking have years of growth ahead of them. The beauty of risk-off phases like the one we are in today is that these secular growth stories can be bought at a sensible price.

UK

Brexit focus hits the pound

1.45

1,40

1.35

1.30

1.25

GBP-USD Exchange rate

2017

Dollar

2018Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Source: Thomson Reuters Datastream, 7.9.18.

Past performance is not a reliable indicator of future returns.

The next six months are going to be a fraught time in the UK as we head towards Britain’s exit from the EU in March 2019. We should expect business investment to be put on hold as the ebb and flow of the negotiations with Europe leave us almost completely in the dark about what the post-Brexit world will look like. At the same time, a slowing housing market and subdued consumer sentiment paint a fairly bleak picture for the domestic economy.

What will this mean for the UK stock market? In line with our experience since the 2016 referendum, the exchange rate will

continue to be a focus for investors. The high weighting of exporters and overseas earners in the UK market means that a weak pound tends to be good for the FTSE 100. This could go both ways and sterling is bound to fluctuate in line with the prevailing headlines. But overall, it is hard to argue for a big appreciation of the pound given all the uncertainty.

A Fidelity fund manager recently told me how he is positioning his UK portfolio towards higher quality companies with overseas earnings that can offer growth whatever happens with regard to Brexit. He has no banks, for example, because of the significant exposure to the UK consumer of the likes of Lloyds, preferring to get financials exposure via international groups like Prudential.

There’s little exposure to real estate but lots of technology. The UK may not have a Google or Apple, but there are lots of smaller tech stocks which offer overseas earnings and an immunity to tariff concerns. There’s oil because it benefits from a strong dollar. Online retailers like ASOS offer a way of playing the shift away from the High Street. Wizz Air provides euro earnings. Food producers like Cranswick and Dairy Crest can compete in a weak pound environment because their rivals are euro-based.

So, an exposure to the UK is not all bad but it does require you to look under the bonnet to see what is actually in a portfolio. As a rule of thumb, big and international is better than small and domestic. With UK interest rates likely to remain lower for longer, high yielders will continue to look attractive and the UK market is still a good source of yield.

EUROPE

It has been a disappointing year for European equity markets, despite an apparently positive set-up at the start of 2018 when the region was our favourite on the back of an ongoing economic recovery, a better political backdrop, decent valuations and a supportive central bank. After a bit of a growth wobble in the spring, all those factors remain in place so the question is whether trade war fears – which remain the biggest cloud over European equities – have been overdone.

Clearly, trade matters a great deal to Europe. It has been estimated that industrial companies’ profit margins effectively doubled in the years following the signing of a raft of free trade agreements in the 1990s so any reversal of globalisation is bad news for a region which exports so much to the rest of the world. The big swings in the share prices of Europe’s car makers this summer as President Trump’s trade rhetoric ebbed and flowed underline how much is at stake.

Another headwind for sentiment in Europe is Brexit. Britain might not be quite as important as we would like to think on the other side of the channel but trade between the EU and the UK is very significant indeed. That almost certainly ensures that some sort of a deal will be thrashed out at the eleventh hour but, in the meantime, the uncertainty is a drag on sentiment.

That is the bad news. The good news is that valuations in the main reflect the challenges. On the basis of the Shiller measure

of long-run valuations, Europe is in line with the average of the past 35 years or so. This compares favourably with the US where shares are much more richly priced. The ECB also remains very accommodating. The central bank has made it clear that interest rates will not be moving higher for at least a year. If the differential between US and European rates widens further, then Europe’s exporters will be helped by a weakening currency too.

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INVESTMENT VALUATION AT A GLANCE

Price-earnings ratio 2018E

Dividend yield 2017

Equities %

US 17.9 1.9

Europe 14.4 3.7

UK 13.7 4.4

Japan 13.6 2.3

Asia Pac ex Japan 13.3 3.0

Emerging Market Asia 12.4 2.6

Latin America 13.3 3.4

Central East Europe, Middle East & Africa

9.9 4.2

Redemption Yield

Bonds %

ML Global High Yield 6.3

German 10-Year Bunds 0.3

ML Global Corporates 2.9

UK 10-Year Gilts 1.6

US 10-Year Treasuries 2.8

Market data

INVESTMENT PERFORMANCE AT A GLANCE% (as at 7th September) 3 m 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018

Equities

S&P 500 4.2 23.8 -2.3 16.3 15.1 18.8

FTSE All Share -4.2 8.5 -5.3 15.9 12.6 3.0

FTSE 100 -4.4 8.4 -8.2 17.3 12.4 2.5

FTSE 250 -3.8 8.6 8.6 10.1 12.2 5.4

FTSE Small Cap -2.1 10.8 4.7 11.5 18.9 5.2

Euro STOXX -4.5 21.1 1.0 0.5 15.4 -1.1

Shanghai SE -13.1 8.7 32.5 0.3 8.9 -19.7

Shenzhen -13.2 17.5 6.6 16.0 -3.8 -14.9

MSCI Emerging Markets -9.9 18.0 -27.0 22.3 20.8 -3.6

Nikkei 225 -2.0 14.9 15.9 -2.9 16.2 17.2

MSCI Latin America 0.2 14.5 -46.1 27.3 18.0 -16.9

MSCI UK Bank -10.8 -9.0 -16.3 -7.5 20.1 -8.7

TOPIX -5.9 12.7 11.8 0.0 18.4 5.4

MSCI China -19.3 12.9 -18.7 16.1 27.1 -5.0

MSCI India 9.2 36.8 -6.4 14.0 9.5 15.6

China CSI 300 -14.4 3.9 32.7 2.8 14.6 -14.4Bonds

US 10-Year Treasuries 0.3 7.8 5.2 7.1 -2.0 -5.8

UK 10-Year Gilts 1.2 8.1 8.7 13.7 -0.7 -1.7

German 10-Year Bunds 1.6 13.3 4.0 9.3 -2.4 0.7

JPM Emerging Markets Bond Index -0.7 13.9 -2.7 15.8 4.3 -5.4

ML Global High Yield 0.4 10.2 -4.6 9.7 9.6 0.6

ML Global Corporates 0.0 8.6 -4.0 8.4 3.4 -2.5

Italian 10-Year Government Bonds 1.3 21.3 3.2 8.7 -5.5 -6.8

Commodities

CRB Commodities Index -4.1 -1.8 -31.7 -7.0 0.9 5.8

Crude Oil (Brent) 1.0 -14.9 -53.2 0.2 15.9 40.3

Gold Spot -7.8 -8.8 -11.8 20.2 0.3 -11.4

LME Copper -19.3 -2.0 -26.2 -10.3 48.4 -13.9

GSCI Soft Commodities -9.7 -5.1 -27.1 30.0 -21.5 -10.3

Silver -16.2 -20.7 -25.1 34.6 -10.2 -22.5

OIL (WTI) 6.9 -8.9 -55.6 -23.7 -3.4 44.5

Source: Datastream, 7.9.18. in local currency terms. Valuations: Source Citigroup Global Equity Strategist – Citi Research, MSCI, Worldscope, FactSet Consensus estimates as at 31.8.18. Bond Yields: Source Datastream as at 31.8.18.

Please be aware that past performance is not a reliable indicator of what might happen in the future. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in small and emerging markets can be more volatile than those in other overseas markets.

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