Funds focused on European, emerging markets and Japanese equities could do well in 2018 as markets look set to carry on growing into the new year, according to by Architas’ Adrian Lowcock (pictured). 
The multi-manager’s investment director said 2017 had been a strong year for equity markets globally with levels of stability not seen since the global financial crisis.
He said: “The global economy has been in fairly good health and we have seen a period of synchronised global growth.
“However, markets have risen strongly in a combination of P/E [price-earnings ratio] expansion and earnings growth, so markets are expensive”, he added.
Lowcock added: “In 2018 we expect the phase of synchronised global growth to continue and corporate earnings to continue to grow.
“However, equity markets are unlikely to have a repeat of 2017 and investors need to look towards areas which offer the best combination of value and growth.”
Below, Lowcock highlights three markets – Japan, Europe and emerging markets – that could do well in 2018 and the best funds to take advantage of any further growth.
Japan
Lowcock said the outlook for the world’s third largest economy has been improving throughout 2017 could be set to in 2018, despite concerns over the markets recent strong run.
According to the Architas investment director, valuations still look attractive relative to the country’s own history and compared with other developed markets such as the US and UK.
“The Japanese economic climate also remains supportive of further stock market gains,” he said. “Quantitative easing and record low interest rates continue in Japan whilst prime minister Shinzo Abe continues to drive through structural change.
The first strategy backed by Lowcock is the three FE Crown-rated Man GLG Japan Core Alpha fund run by head of Japanese equities Stephen Harker and senior portfolio managers Neil Edwards and Jeff Atherton.
“Stephen Harker is a contrarian investor, actively looking for companies out of favour with investors,” he said. “He selects companies with strong fundamentals where he believes there is the opportunity for a turnaround.
“The portfolio is currently positioned to benefit from a stronger economy in Japan with exposure to cyclicals and financials”.
In the 10 years to 18 December, it has delivered a total return of 199.18 per cent compared with a 125.35 per cent gain for the average IA Japan sector fund.
However, the strategy has struggled over the past year returning just 7.92 per cent against a sector average return of 18.31 per cent.
The fund has an ongoing charges figure (OCF) of 0.90 per cent.
The second Japan fund identified by Lowcock is the four FE Crown-rated Baillie Gifford Japanese which is managed by Matthew Brett and Sarah Whitley.
The managers seek out special situations, cyclical stocks and secular themes, and companies with steady growth.
“The focus of this fund is very much long-term growth which can result in short term underperformance and volatility in the fund,” said Lowcock.
Performance of fund vs sector & benchmark over 10yrs
Source: FE Analytics
The Baillie Gifford fund was the sector’s best performer in 2016 and has made a top quartile return this year.
It has been consistently in the top quartile over one, three five and 10 years, returning 229.79 per cent over the last decade – almost double the TOPIX’s return 130.58 per cent gains.
The fund has an OCF of 0.63 per cent.
Europe
With a more stable political landscape than in 2017 and a much-improved economic outlook for 2018, Lowcock said the European market continues to offer value.
He explained: “Business and consumer confidence has been improving across the region and corporate earnings put in a strong single digit growth in 2017 and is expected to repeat that this year.
“In spite of this improved outlook investors have remained fairly cautious preferring to wait for the evidence before revaluing stocks,” he said.
“So, as with Japan, although markets rose they only did so to reflect the rise in earnings – valuations didn’t go up.”
Schroder European Alpha Income is one of Lowcock’s two fund picks for the region, noting manager James Sym’s business cycle approach to investing.
“There is a tendency towards value stocks but this will vary with where Sym believes we are in the economic cycle,” he explained.
“The cyclical stock picking strategy should benefit investors most in rising market and is designed to take the most advantage of the European recovery.”
While the three FE Crown-rated fund has generated a total return of 17.05 per cent to investors year-to-date, it has underperformed the average IA Europe excluding UK sector peer, which has delivered a 17.35 per cent gain.
The £1.3bn fund has an OCF of 0.92 per cent.
The other fund backed by the Architas investment director is Blackrock European Dynamic run by FE Alpha Manager Alister Hibbert.
Lowcock said his flexible but defensive style allows him to adapt the portfolio to changing market conditions.
“Hibbert runs an unconstrained fund with a focus on companies which have higher potential earnings growth than the market over the medium and long term,” he explained. “The flexible approach means the fund will change style from growth and value depending on where we are in the economic cycle.”
Performance of funds vs sector & benchmark YTD
Source: FE Analytics
This four FE-crown rated fund’s performance has been strong this year, returning 26.31 per cent year-to-date, as the above chart shows. It is a top quartile performer over one, three and five year and has an OCF of 0.92 per cent.
Emerging Markets
Lastly, Lowcock said emerging markets could be set to carry over some of the strong performance seen in 2017 into the new year.
The Architas investment director was particularly bullish about Asia, which he believes will benefit from a ‘halo effect’ related to Chinese growth.
“China looks set to lead emerging markets as the underlying economic data is supportive of strong single digit growth and valuations remain attractive, he said. “Whilst debt in the country continues to rise this is currently offset by the foreign reserves and continued economic growth.”
He also highlighted India as an emerging market economy worth considering, as he believes structural reform should start to show some benefits over the coming years.
According to Lowcock, RWC Global Emerging Markets and Fidelity Emerging Markets might be worth considering for 2018 given some of the themes above.
A relatively recent launch, RWC Global Emerging Markets is run by John Malloy and has delivered a return of 105.57 per cent since launch compared with a 75.47 per cent gain for the MSCI Emerging Markets index.
“At the moment, they favour China on valuation grounds, but the fund can invest anywhere in emerging markets and the team are flexible to act quickly if the outlook for China should change,” noted Lowcock.
“This fund will be well positioned to benefit from the success of China or avoid the region if outlook sours.”
Fidelity Emerging Markets, meanwhile is a fund which invests in companies with superior business models demonstrating strong and sustainable profitability and a consistent track record over time, according to the investment director.
“Manager Nick Price, is looking for confirmation of quality through superior and sustainable return on assets, strong and unleveraged balance sheets, track record and valuation,” said Lowcock.
“Price prefers self-funding businesses which treat shareholders fairly. He is also interested in companies with long term growth potential where reinvestment in that growth delivers a high rate of return.”
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Price took over the four FE Crown-rated fund in 2010, and over the past five years it has delivered a total return of 77.56 per cent compared with a 47.46 per cent gain for the MSCI Emerging Markets index and a 44.11 per cent return for the average IA Global Emerging Markets sector fund, as the above chart shows.
It has an OCF of 0.99 per cent.