Capital Markets Outlook  |  Q1 2018

Global GDP improving as regions face distinct issues

Equity insights

Global GDP improving as regions face distinct issues

U.S. tax reform can lift industrials

In the United States, tax reform is expected to provide a boost to business profitability and provide many more ancillary benefits. The Tax Cuts and Jobs Act should serve as a catalyst to further accelerate capital and operational spending by businesses, particularly for many industrial companies that have been woefully underinvested in capital equipment. In addition, the extended period of outperformance of growth over value suggests we may see more plentiful valuation opportunities in 2018, notably in undervalued sectors such as retail and energy.

Emerging markets may remain on upswing

For emerging markets, despite their strong run in 2017, we believe interesting opportunities remain. When compared with other equity markets, particularly the United States, EM stocks are relatively inexpensive on some measures. In addition, the bulk of EM outperformance in 2017 was concentrated in a handful of Asian technology stocks, leaving attractive choices across a variety of other sectors and capitalization sizes. For China specifically, President Xi Jinping's second term in office may herald an era of faster reforms, with a focus on quality of growth rather than growth at any cost. Technology and environmental protection appear to be attractive growth themes for Chinese stocks in the coming years.

Governance improving in Japan

Another area of note is Japan, where we are seeing improving corporate governance and profitability for many Japanese businesses. For several years, the government under Prime Minister Shinzo Abe has been exerting pressure on company boards to increase their return on equity for shareholders. Prior to this, companies had been running conservative, cash-heavy balance sheets and relied on conglomerate-style business models to insulate themselves from cyclical weakness in any one industry. While the changes have been slow to take hold, we are seeing increasing signs that companies are improving both their profitability and the efficiency of their balance sheets.