Part three of our outlook for the remainder of 2018 looks at sectors.
Sectors: What should investors be wary of in the remainder of 2018?
Spotlight on sectors
The first half of 2018 has witnessed a pickup in market volatility which had peaked in February and March but fell off in Q2; Brexit negotiations continued to test the confidence of the UK government and there was the threat of a trade war from the United States – these events are of course amongst a number of others. The question is; what should investors be wary of in the last six months of 2018?
Our Investment Research Manager, Sheridan Admans, gives his thoughts on the next 6 months in part three of our 2018 outlook.
Central bank policy, growth and political instability
Central banks continue with Quantitative Easing (QE) and more recently Quantitative Tightening (QT) experiments, entering a phase of interest rate differentials. The US Fed is raising rates at a faster pace than the UK, European Central Bank or Bank of Japan. It is anticipated that the ECB will likely join the QT party at some point in 2019 with no expectation the BoJ is likely to commence tightening in the foreseeable future.
We are starting to see signs of inflation picking up, supported by tax reforms in the US, trade negotiations and a rising oil price. Rates are expected to continue to rise in the US with the potential for one small rise here in the UK over the summer. Growth seems to be slowing, albeit expectations about the pace of growth ahead have become more dispersed among forecasters, as we progressed through the first half of 2018.
Political instability, oil price shocks and central bank policy missteps could provide the most forceful headwinds. From a political standpoint the status quo is being challenged on a number of fronts, notably in Europe there is Brexit, populist governments in Italy, Austria, Hungry, a fragile coalition in Germany, in the US President Trump has been challenging on all fronts, recently instigating a trade war with China and Europe.
Technological change and ageing populations have led to a greater consumption of healthcare products and services in recent years, causing the sector to exhibit more growth characteristics having generally been considered defensive. Additionally, technological change has seen healthcare become more affordable privately and more accessible, particularly in emerging economies.
It is anticipated that demand will rise for healthcare products and services with global healthcare spending projected to reach $8.7trillion by 2020. Outside of the US, which accounts for 44% of the global market, China continues to expand its national healthcare system. Social security spending on healthcare is estimated to rise over 50% in Japan as the country struggles to cope with the challenge of an ageing population.
The balance sheets of healthcare companies remain solid and flush with cash. They offer attractive dividend yields and there is an increasing possibility of more share-enhancing buy-backs. The benefits of Trump’s tax reforms seem to be exceeding expectations in healthcare too with lower corporate rates, tax repatriation and incentives to boost capital expenditure. The sector has tended to outperform during FED hiking cycles on average since 1970.
Stock market volatility in the 1970s resulted from flat returns from stocks, oil price shocks, political instability and central bank policy that led to stagnant economic growth. Whilst the market parallels are not like for like, similarities certainly exist. Whilst past performance is no guide to the future, it is a good starting point to understand the possibilities, and if history were to repeat itself, investors may expect to see the start of another period of significant rises in the gold price. Outside of gold we continue to steer clear of commodities more generally, as concerns over a trade war build and slower growth in China is expected.
As stated in our overseas outlook, we are more cautious on the US, but we believe investors should not be too light in their US exposure, as we continue to see opportunities in technology, healthcare and financials as they are all sectors of the market in which America has dominance.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.