Global Equity Income 2018 Outlook
As markets shrugged off geopolitical tensions and continued to rise, Mark Whitehead reflects on what 2017 meant for income investors and what lies ahead in 2018.
11 January 2018
What were the key drivers of markets last year?
Strong momentum and low volatility led to very positive total
returns for the market in 2017, making it a fantastic year for
investors’ risk-adjusted returns. A synchronised global
upswing in economic activity and some strong earnings
quarters drove outperformance of cyclical sectors. Our
strategy has high allocations to a number of these stocks
and benefited as a result – financials, materials and
industrials sectors all producing strong absolute returns for
Technology was a big driver of the market and the bestperforming
sector overall for the year. Needless to say, this is
an area where dividend investors have historically struggled
to gain exposure, but where we have, nevertheless,
identified attractive opportunities. Indeed, a handful of large
technology names producing aggressive dividend growth,
provided strong absolute returns for the strategy.
However, the theme of disruption (from e-commerce and
internet names in the technology sector) has been a big
headwind for companies in the consumer space. Firms in
areas such as media, retail and discretionary, where the
strategy has holdings, have suffered from the impact of
increased competition. Traditional income sectors, such as
telecommunications and real estate have also struggled to
keep pace with the wider market (although real estate was a
strong contributor for the portfolio over the year).*
Did your strategy perform as you would have expected in 2017?
In terms of style, high-dividend stocks lagged the wider
market in 2017. The strategy, which has a high yield, was
around the median level for the peer group.†
Over the course of the second half of 2016 and early 2017
we re-positioned the portfolio to maximise its dividendgrowth
potential, increasing the weighting to more cyclically
sensitive sectors, such as technology and materials. As a
result, with higher forecast growth potential, the total return
of the fund has improved over the last year. It is also pleasing
that the strategy has produced some attractive dividend
growth for shareholders.
The best-performing region both at a market and portfolio
level was Europe. North American equities, meanwhile
somewhat lagged other markets. This is a region where we
find it harder to find higher yield and we selectively reduced
our average weighting to below 50%, in favour of European
and Asian companies. Our stock selection in North America,
driven by US energy and consumer names, was
disappointing. Energy companies were impacted by weak oil
prices earlier in the year and consumer names by the
widespread disruption from technology names.*
Due to the disruption mentioned previously, the consumer
space was difficult to navigate for many investors in 2017,
and we pulled back from investing in some attractively
valued names, which became cheaper as the year
progressed. Similarly, we were also quick to cut some stocks
that had started to perform poorly.
What do you think will be the key drivers for your markets in 2018?
Economic conditions have been strong in the past year,
and we expect this to continue into 2018. The US could
accelerate the fastest with business activity rebounding,
capital expenditure improving and a resurgence of
Keynes’ ‘animal spirits’ (positive sentiment in the market),
as corporate tax changes are implemented.
This economic backdrop should bode well for corporate
activity and thus earnings growth should remain positive.
We believe this has to be the case as equity markets are
expensive on a number of different short and longerterm
valuation measures and cannot continue to be
driven by multiple expansion, as has been the case over
the past seven years.
China’s role will be vital, as it has been injecting huge
levels of liquidity into its economy over the past year.
While this has not increased its own economic growth, it
has arguably been responsible for much of the global
upswing in economic activity in 2017. As a result, if
Beijing's policies are reversed, this may well cause a
We are also watching central banks very carefully; in
particular, the US Federal Reserve, as it embarks on the
withdrawal of stimulus provisions, through the tapering
of quantitative easing. This could cause yield curves to
rise and steepen and introduce volatility into asset
markets, a marked change from the particularly benign
level of volatility we have witnessed over much of the
Cyclical sectors, meanwhile, should continue to perform
well, driven by the industrials, materials, technology and
How are earnings revisions and valuations looking relative to historic averages and other markets?
Earnings revisions continue to look positive and have
been in an improving trend since February 2017. The
strongest revisions to expected earnings globally are
coming from the more cyclical areas of the market for
2018 – materials and technology have the strongest
earnings upgrades for 2018. Traditionally more
defensive, low-growth sectors have not seen the same
level of revisions with healthcare and telecoms relatively
Many market commentators are bemoaning how
expensive global equity markets have become, and on
many measures it's difficult to disagree. For example,
the US Cyclically Adjusted Price to Earnings (CAPE)
ratio, based on the S&P 500 index, is currently over 30x
and has only been at a higher level twice before – in
September 1929 prior to the Great Depression and
December 1999, just before the dot-com bubble burst.††
Earnings revisions continue
to look positive and have
been in an improving trend
since February 2017. The
strongest earnings revisions
globally are coming from
the more cyclical areas of
the market for 2018.*
However, we believe this current period is somewhat
different, as equities look much cheaper relative to
other asset classes, such as real 10-year governmentbond
yields (minus inflation rate) – which are currently
negative for the UK, Germany and Japan and only just
in positive territory for the US. We also do not see
evidence of any sector which is absurdly overvalued. Of
course, some of the high-profile tech giants do look
expensive – and have driven a large proportion of the
past year’s total return – but a correction in these names
is unlikely to drive a recessionary-type response from
the wider equity market.
We are also able to derive intrinsic upside in our own
company valuation models, using fairly conservative
assumptions on cost of capital and growth rates. These,
combined with our own and consensus expectations for
strong dividend growth in 2018,** gives us confidence we
are not about to witness a large market correction.
What are the biggest risks to your markets in 2018?
There are a number of ‘known unknowns’ which
investors will be aware of, including politics, the risks of
terrorism and tensions on the Korean Peninsula. Donald
Trump’s destabilising influence on the world stage does
concern us. His decision to move the US Embassy in
Israel to Jerusalem, for example, was widely condemned
(and could fan the flames of geopolitical rhetoric).
In the UK, the Brexit negotiations moving into the
second phase ahead of the final ‘divorce’, could be very
tricky and cumbersome. There is much to work out in
terms of trade treaties, healthcare, movement of labour
and more, all of which will be very important for the
UK’s economy and international standing for
generations to come.
In terms of other potential risks, central bank policy
error (by raising interest rates and withdrawing quantitative-easing stimulus too quickly) could lead to a
disorderly sell-off in bond markets – causing a de-rating
of equity markets; a slowdown in China (which could
come from Chinese credit tightening) could potentially
cause global growth to falter; and there is the risk of an
earnings slowdown. At a company level, technology
disruption continues to upset traditional ‘old-economy’
businesses. This could have a destabilising effect in a
number of areas, including labour trends, inflation, social
wellbeing and politics.
What sustainability themes do you see yourself engaging with companies on most in 2018?
As a reminder, we believe companies with robust
sustainability practices demonstrate better operational
performance, which ultimately translates into cash flows
(and dividends). It is also the case that prudent
sustainability practices have a positive influence on
We engage with companies on a wide range of
environmental, social and governance (ESG) matters,
with the most material issues naturally varying from
company to company. There will, of course, be some
common themes which we are focusing on. These
include management remuneration (whether pay is
aligned with company strategy and in line with
sustainable business practices) and the independence of
management boards (and whether there is an avoidance
of overboarding or board entrenchment). There's also
the issue of labour management, with a key focus being
companies that acquire other firms and are initiating
cost-cutting programmes. Finally, there's the theme of
pollution, particularly as it relates to greenhouse gas
emissions (climate change), an area that brings both
huge risks for companies and opportunities.
*Source: Martin Currie over 12 months to 31 December 2017. †Source: FactSet and Lipper IM as at 31 December 2017. Peer group is IA Global Equity Income.
†Source: FactSet and Lipper IM as at 31 December 2017. Peer group is IA Global Equity Income. ††Source: Robert Shiller, Yale. **Source: UBS PAS. Benchmark: MSCI AC World Index (as at 29 September 2017).
More information on the strategy
Global Equity Income January 2018 update
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