What fund managers expect in 2018

GLOBAL EQUITIES

Andrew Bell, chief executive officer, Witan Investment Trust (WTAN)

A broadening of economic growth has been matched by an end, or at least interruption, to the ascendancy of US equity returns. With the exception of the UK, all other major regions outperformed the US market in currency adjusted terms due to starting valuations being lower and improving confidence on the back of faster economic growth.

The improvement in the level and breadth of global growth is likely to continue in 2018. This is good news for general prosperity, but a cool investing head may be needed at times to navigate markets that are relatively highly valued by historic standards, against a backdrop where the tailwind from low interest rates and quantitative easing (QE) liquidity is abating and, in some cases, starting to reverse. Central banks will use the opportunity of better-entrenched growth to start raising interest rates from near-zero levels, although it seems likely they will do this very gradually, for fear of interrupting economic convalescence. The reduction and gradual reversal of central bank buying of bonds is a slow-burn fuse that seems likely to push bond yields higher.

High ratings on equity markets appear rational given low interest rates. But this could be undermined if bond yields spike higher in response to a material rise in inflation or overzealous tightening by central banks. A rise in inflation appears the greater risk, despite the deflationary forces from demographics, debt and technological disruption. A moderate rise in inflation would be a sign of economic improvement, so there could be a divergence between markets and economies during 2018. But unlike in recent years, this would be with economies doing better and markets as a whole prone to periods of profit taking, in response to tighter monetary policy or inflation scares.

Markets will always fluctuate around the underlying trend set by the drivers for corporate profits and, with decent economic growth expected to continue, time should be on the side of patient equity investors.

But what slightly concerns us, having for some years been more optimistic than most on economies and markets, is that fewer people are sceptical or negative than a year ago, with increased complacency making markets more vulnerable to disappointment. This makes a case for greater selectivity rather than outright defensiveness. Some of the more cyclical areas such as industrials and financials could do well as residual scepticism melts, and emerging economies also seem likely to build on the improved relative showing over 2016 to 2017.

For contrarians, the domestically-exposed stocks in the UK market have de-rated substantially and may be more responsive to any glimmers of good news, having discounted much of the unpredictability of the Brexit process. It’s perhaps too early for a major leap of faith in this area, but it is usually more right than wrong to be a contrarian as an investor – as long as you check that the truffle on offer is not a toadstool.

James Thomson, manager of Rathbone Global Opportunities (GB00B7FQLN12)

he second half of next year is likely to be weaker and this will start in the US. There is a deteriorating outlook, with lead indicators such as US manufacturing PMIs and US capacity utilisation declining. More economic data could deteriorate next year, so the types of stocks best placed to weather this are growth stocks. Value stocks underperform when the economy is weakening. 

Other areas to avoid in 2018 include emerging markets, commodities – because their price is hard to predict – and industrials, as their success is based on the economy rather than each company’s individual attributes. 

Areas to overweight in 2018 include the US, a hotbed of innovation for growth – some of the best teams I see are based there. Valuations are not cheap, but it is growth at a reasonable price. The US also offers transparency, breadth and depth of markets.

I would also overweight the internet and technology. Tencent (700:HKG), for example, will keep on performing in a deteriorating environment. It is my only Asian investment, which I have held since 2010 and it has gone up a lot. Its growth comes through continuously and it surprises on the upside.

Bruce Stout, manager of Murray International Trust (MYI)

Should central banks deliver on expected monetary tightening in the developed world then it’s reasonable to expect that higher interest rates will start biting into personal consumption and the housing sector. We also expect overall growth to slow.

If monetary authorities also begin the onerous task of trying to shrink overextended sovereign balance sheets then further contractionary forces will be experienced. Consequently, the risk of recession in the debt-dependent developed world rises sharply in 2018.

Initially, emerging markets may be challenged by higher interest rates and increased uncertainty, but as the possibility of recession becomes more evident developed market yield curves are likely to flatten at the long end. Interest rates in emerging markets such as India, Indonesia, Mexico and Brazil could decline in 2018, if currency stability can be maintained. Expect growth in emerging markets to be vastly superior to the slowing developed world, even if China begins to slow to more sustainable rates of long-term growth.

Corporate balance sheets have become increasingly stretched in recent years as bond issuance has significantly increased leverage. Record lows in interest rates have encouraged companies to take on excessive debt.

Financial markets will become increasingly vulnerable to the collapse in share buybacks and likely dividend cuts in the UK and Europe. The sectors most vulnerable to disappointment include retail, consumer discretionary, housing and financials. Most companies will continue to struggle to grow revenues, and margins remain hostage to intense competition and lack of pricing power against a deflationary backdrop.

Emerging market companies remain well positioned to benefit from positive operational leverage as growth broadens out. Consensus expectations for earnings and dividend growth remain low, and can once again be comfortably surpassed by those companies exposed to favourable demographic trends and the ongoing rise in personal disposable income. Consumer and financial sector stocks appear most attractive within the emerging world.

Having experienced some of the lowest volatility since records began, we expect the global equity landscape to become more volatile as macroeconomics and corporate-specific risks escalate. Capital preservation and well-financed dividend growth will be the key objectives for 2018.

UK

Job Curtis, manager of City of London Investment Trust (CTY)

The world is enjoying a period of synchronised economic growth. Both developed and emerging economies are expanding. The key improvement over the past 18 months has been from the eurozone, which has at last moved forward in response to the stimulatory policy of the European Central Bank (ECB).

The large capitalisation part of the UK stock market has a spread of multinational companies which are benefiting from global growth. For example, commodity prices such as those of iron ore and oil reflect increased demand as economies grow. Combined with greater discipline in capital expenditure from companies, this has led to much more favourable operating conditions for mining and oil companies.

In the mining sector, Rio Tinto (RIO), BHP Billiton (BLT) and Anglo American (AAL) have made large dividend increases over the past year. And in the oil sector there is greater confidence in the sustainability of the BP (BP.) and Royal Dutch Shell (RDSB) dividends. BP has recently announced a share buyback, and Royal Dutch Shell is returning to an all-cash dividend.

UK domestic stocks have been somewhat out of favour given the uncertainty over Brexit. But this has left some very interesting share price valuations. For example, the two largest real-estate investment trusts (Reits), Land Securities (LAND) and British Land (BLND), are trading at discounts to their underlying assets of around 30 per cent. Their dividend yields of over 4 per cent are backed by the rental income from high-quality tenants on long leases. Dividend yields of over 5 per cent from housebuilders Persimmon (PSN) and Taylor Wimpey (TW.) also look interesting, given their strong balance sheets and the underlying demand for new houses in the UK.

We are confident in the sustainability of the UK equity dividend yield of 3.7 per cent, as measured by the FTSE All-Share Index. By contrast, the UK Bank Rate is only 0.5 per cent, even after the recent 0.25 per cent increase, and commentators expect at most an increase of 0.5 per cent to 1 per cent during 2018.

UK government bond yields also look low relative to the equity market, with 10-year yields at 1.25 per cent and 30-year yields at 1.85 per cent. While equities will always be the more volatile asset class, we believe that the risk compared with reward remains favourable for UK equities for the year ahead.

Richard Buxton, chief executive of Old Mutual Global Investors 

Despite the fact that we are nervous that asset prices are elevated and valuations are full, if the world continues to grow there’s no reason why profits can’t continue to grind upwards. So 2018 could be a replay of 2017 in terms of modest profits growth, continued maintenance of valuation multiples and a high single-digit return from stock markets.

I think that growth shares in many cases are pretty stretched in valuation terms and I anticipate that as interest rates do gradually grind forward, led by the US Federal Reserve, we will get some reversion to value outperforming.

The UK economy slowed through the first half of the year because of the sterling collapse and consequent pick-up in inflation, and that’s really squeezed real incomes as consumers tightened their belts. While the current survey data suggests that’s ongoing, medium inflation is peaking round about now and I think it will begin to fall away during the course of 2018. We are at the worst of that squeeze in real incomes and they will probably expand a little bit next year.

Employment continues to be pretty good and corporate sector confidence continues – so far it has continued to stay pretty firm despite Brexit approaching. We don’t think we’re going into recession, but gross domestic product (GDP) growth will be 1.5 per cent to 2 per cent next year. The biggest risk to the goldilocks scenario is a surprise pick-up in wage inflation in the US. At some point we will begin to see a pick-up in wage inflation. If it’s gradual, that’s fine, but if it’s sharp, bond yields could spike and people could worry about the Federal Reserve being behind the curve, meaning it raises rates more than anticipated. And that could have an impact on equity markets.

A second risk in the UK is politics. Markets are not remotely pricing in how high the possibility is of a Corbyn-led, socialist, highly redistributive government coming to power. But I like a lot of the UK domestic names that are very cheap and am still happy having a lot of international stocks with dollar earnings.

Alex Wright, manager of Fidelity Special Situations (GB00B88V3X40)

With aggregate valuations not as attractive as they once were and the current bull market one of the longest in history, I don’t think we should expect the FTSE All-Share to continue delivering the roughly 10 per cent a year that it has since the financial crisis almost a decade ago.

The spectre of Brexit looms large, and I expect markets are going to have to contend with a more uncertain and volatile backdrop – even compared to this year. However, this kind of environment is likely to create some interesting stockpicking opportunities. Periods of macro-driven volatility tend to throw up valuation opportunities which are more difficult to find if markets are steadily trending upwards, such as over the past few years.

Further policy normalisation by the Bank of England could have profound implications for the leadership of equity markets. We've had 10 years since the financial crisis where steady businesses with stable cash flows have been in favour, and this has driven strong growth in share prices in areas such as consumer staples. These types of companies have historically struggled in an environment of rising interest rates and we could now be at a point of change, where the market may start to reassess the prospects of hitherto unloved sectors.

In particular, banks could continue to positively surprise investors in the coming months. Valuations are attractive as they have been out of favour for some time, with most investors viewing them as one of the riskiest sectors in the market. This viewpoint is understandable, albeit one that I fundamentally disagree with. The trauma and aftermath of the crisis still dominate the collective imagination of the market, and seem to be preventing investors from recognising the profound changes that have occurred inside banks and in the external operating environment.

Intense regulatory scrutiny means balance sheets are now generally much stronger than they have been for some time and the loans that are being written would seem to be much less risky than those made pre-2007. Regulators are also becoming more willing for banks to make sizeable distributions to shareholders in the form of dividends and share buybacks.

Financials remain the largest sector weightings in Fidelity Special Situations and Fidelity Special Values (FSV). Key positions include Lloyds Banking Group (LLOY), as well as international holdings Citigroup (C:NYQ) and Bank of Ireland (BIR:ISE), where I see decent downside protection as well as the potential to deliver expectation-beating results.

EUROPE

Alice Gaskell, manager of BlackRock Continental European Income (GB00B3Y7MQ71)

As we enter 2018 we find ourselves in a very positive economic environment. European governments are focused on reducing unemployment and encouraging investment, and central banks remain supportive. While the European equity market is no longer cheap, there are still many opportunities to capture low-risk cash distributions and steady growth from companies in a wide range of sectors and countries.

So we are focusing the portfolio on stable businesses with steady growth prospects where valuation is not extreme. We favour companies in consumer sectors with growth driven by strong brands, online distribution advantages and emerging markets exposure. In healthcare and industrial sectors, we are supportive of companies with growth driven by research and development investment leading to innovation and new products. And in telecoms, utilities and infrastructure sectors we like companies with growth driven by investment in fibre networks, renewables, smart grids, motorways, airports and liquefied natural gas infrastructure.

At the moment high yield is generally a signal of risk and/or low growth, so we are very selective in sectors such as financials, utilities and energy where yields are high. We are focusing on businesses that have invested steadily through the past five years, which has been a period of significant change. These companies, which are led by strong management teams, are now benefiting from offering highly differentiated products and services. High-growth stocks in some of the sectors that led the market this year, such as technology and capital goods, are starting to look very expensive and we have reduced exposure to this area of the market.

We feel confident that over the long term the relative stability of our holdings, which have strong balance sheets and non-cyclical growth drivers, will reward patient investors.

Sam Morse, manager of Fidelity European Values (FEV)

Continental European investors have become much more confident and optimistic in recent months, and many are now willing to take on more risk in equities, high yield and other markets. This is understandable given the improving backdrop in terms of the European economy and corporate earnings, at the same time as a quieter period in Continental politics.

But valuations make me nervous – continental European markets have more than doubled in sterling terms over the past five years since Draghi’s famous commitment to do “whatever it takes” to keep the eurozone together. The problem is that for most of that period earnings have not gone up much, requiring rising valuations to drive the price return.

I disagree with the consensus view that European shares are cheap. Much of this illusion of cheapness is a function of the US sector mix and higher returns compared with Europe. I think, at best, we could say that continental European markets are a bit less expensive than the US market – but no more than that.

However, continental European earnings are at last rising, even hitting double-digit growth in the first quarter of this year. So there is some hope that Europe’s stock markets can now grow into their lofty valuations. Earnings growth expectations are high, however, which leaves little margin for error as we approach more difficult comparison periods. The high level of valuation will also make the stock market particularly vulnerable to any disappointment in earnings delivery.

US

Angel Agudo, manager of Fidelity American Special Situations (GB00B89ST706)

The US economy has entered the later stages of the business cycle, with the unemployment rate close to previous lows and monetary stimulus being reduced.

Typically, low unemployment and healthy economic growth have led to a rise in wages, core inflation and interest rates. However, despite the late-cycle dynamics, near-term recession risk remains quite low. Wages and interest rates probably have room to rise from their low levels before they cause problems for companies and the economy.

And if wage growth and interest rates remain low, or productivity picks up, then the cycle could potentially last longer. Regulatory and tax reforms may also support economic growth if implemented correctly. 

The US market has been in a bull run for nearly a decade and valuations are far from cheap. Aggregate profit margins across sectors are near all-time highs, and companies have taken advantage of the near-zero interest rates to pile on debt. For companies generating sizeable returns and with safer business models, levering up was the right thing to do.

Consequently, there is now a large set of companies that either look stretched from a valuation perspective, or have reasonable valuations and safe business models but worse balance sheets. But there are also sectors where companies have been more prudent, given their past mistakes. For example, banks have never been better capitalised and energy companies have discovered a new level of financial discipline.

In such an environment it is important to be fundamentally driven and look for bottom-up stock picks within sectors. It is also crucial to look for opportunities that provide good downside protection. Generally, I am looking for investments that have some counter-cyclical characteristics, generate stable cash flows and have pristine balance sheets.

Fiona Harris, client portfolio manager at JPMorgan US Smaller Companies Investment Trust (JUSC) 

Smaller companies tend to be an early cycle and domestic play, and US smaller companies could benefit more from tax reform and deregulation, because they have a higher effective tax rate than large-caps. And investor sentiment towards small-caps could also improve.

An area that could do well because of the possibility of three to four interest rate rises in the US in 2018 is financials. These still look attractive and if interest rates rise their net interest margins will expand because, for example, they could set higher interest rates on loans.

Healthcare could also do well, driven by demographics and healthcare inflation, in particular companies with good long-term sustainable advantages. There have also been mergers and acquisitions in that space this year and we expect the trend to continue.

The US is expensive, although if your holdings deliver better earnings growth than your benchmark, you should get rewarded more than your benchmark. 

If GDP growth continues at about 3 per cent, this and tax reform could push smaller companies’ earnings growth higher. One area of the market that has not been rewarded is consumer discretionary, which has lagged the market due to issues such as ecommerce and the possibility of wage growth. An area that has held up really well is restaurant chains, but these are often in big shopping malls so the problems created by ecommerce are trickling down to these.

Although technology has done well, it has not been the best performing sector among smaller companies. We would be surprised if smaller technology companies that are highly leveraged do well next year if interest rates rise, as some of these have huge amounts of debt.

JAPAN

Ken Maeda, head of Japanese equities at Schroders

The most recent Japanese GDP data for the quarter to September 2017 marked the first time in more than 15 years that the country’s economy has grown for seven consecutive quarters. The Bank of Japan’s latest quarterly Tankan survey also indicates growing confidence among Japanese companies. The aggregate survey responses indicate capacity shortage across all industries, a meaningful change from the excess capacity situation the economy had faced for almost all of the past 25 years, and which should bode well for capital expenditure into 2018.

The unemployment rate has dropped to 2.8 per cent, the lowest level for more than 20 years. Despite this, wage growth has been much slower to materialise than we would have expected, even though a lot of economic data is pointing towards higher wages. With robust corporate profit growth continuing, the profit share of GDP has reached record levels, emphasising the growing disparity with labour incomes.

The majority of companies produced positive earnings surprises for the June and September quarters compared with the consensus, and a much higher proportion than usual have been prepared to revise up their full-year numbers early in the fiscal year. This reinforced our belief that initial estimates were overly conservative and have generated a strong upward revision cycle for corporate profits. Although some of this profit growth has been discounted in share prices during the recent rally, overall market valuations are still attractive relative to their own history and compared to other global markets.

The domestic economy continues to head in broadly the right direction, so the risks remain largely external. These include the risk of increased US protectionism and trade retaliation. This could easily return to the political agenda if the US administration continues to struggle to deliver on other elements of its growth strategy. 

Following the lower house election in October, the Liberal Democratic Party and Komeito coalition has retained its two-thirds majority. The election result also reduces the uncertainty around the position of the governor of the Bank of Japan, Haruhiko Kuroda.

We should certainly anticipate a continuation of aggressive monetary and fiscal policies which are very supportive for the Japanese equity market. A further slight acceleration in fiscal spending may also be possible as an offset to the planned increase in consumption tax scheduled for October 2019.

This policy environment should provide favourable conditions for continued solid growth in corporate profits in 2018. Companies are gradually regaining some ability to raise prices and this should feed through directly to higher profits as the operational gearing of companies is high after a long period of deflation.

We need to be alert to the prospect of higher wage costs, which could impact some companies negatively but, in aggregate, these macro trends simply represent a normalisation of Japan’s economy and should be positive overall for sentiment.

CHINA

Dale Nicholls, manager of Fidelity China Special Situations (FCSS)

We are currently in the midst of a cyclical upturn in the economy. Supply-side reform in areas such as steel and cement has helped lift pricing across a range of commodities. On the policy front, there is increasing rhetoric focused on the risks associated with the build-up of credit we have seen in the economy. This focus could become stronger post recent leadership changes – all positive in addressing the long-term health of the economy.

The environment remains positive for ongoing growth in consumption as part of the natural expansion of the middle class, a key investment theme for the portfolio. While market sentiment has clearly turned more positive on the risk-reward balance around the opportunities in the Chinese market, we still find good value relative to the long-term growth potential.

ASIA EX JAPAN

Jason Pidcock, manager of Jupiter Asian Income (GB00BZ2YMT70)

The next 12 months are likely to see continued earnings and dividend growth across the region, and the political landscape ought to be more settled. Mid-single-digit GDP growth figures in a number of countries and steady export markets should lead companies to invest and reap more, and we broadly expect about the same proportion of earnings will be paid out in dividends.

I see opportunities in Singapore and Taiwan due to appealing valuations and strong balance sheets. After a prolonged period of relatively low growth in Singapore, economic activity is picking up, and there are a number of listed companies with dividend yields around double the level of the local 10-year government bond yield.

In Taiwan, the 10-year bond yield is lower, and we can find attractive companies with significant yield premiums and net cash balances, typically in the technology sector. Historically this is quite cyclical but it is currently benefiting from some structural growth drivers, such as a greater number of computer chips being used in vehicles and greater connectivity between products.

While the US leads the world in the development of software, it is Asia that rules in terms of hardware technology. The three largest positions in Jupiter Asian Income Fund are Asian hardware technology manufacturers Taiwan Semiconductor Manufacturing (2330:TAI) and Hon Hai (2317:TAI) in Taiwan, and Samsung Electronics (SMSD:LSE) in South Korea. All are in a large net cash position, and have demonstrated an ability and willingness to pay reasonable dividends. These companies are set for another good year in 2018: they have excellent dividend growth potential and they maintain strong balance sheets.

Other businesses that stand to benefit from structural demand growth are those operating in the areas of travel, tourism, entertainment and healthcare. As consumers in the region benefit from improved levels of disposable income, they gravitate towards the types of spending patterns we see in the west, where experiences compete with things for wallet space, and healthcare expenditure rises as people live longer and have more income to spend on sickness and injury treatment. Companies we hold in these sectors include Malaysia Airports (AIRPORT:KLS), Sydney Airport (SYD:ASX), NWS Holdings (659:HKG), ST Engineering (S63:SES), Sands China (1928:HKG), Tencent and IHH Healthcare (IHH:KLS).

It makes sense to pay close attention to balance sheet strength, and favour companies with a net cash position or low levels of debt. It is also important to ensure the portfolio remains very liquid and not vulnerable to sharp price movements due to bouts of market illiquidity.

EMERGING AND FRONTIER MARKETS

Nick Price, manager of Fidelity Emerging Markets (GB00B9SMK778)

The impressive run in 2017 was set against a backdrop of better economic data, less pronounced dollar strength, stronger local currencies and more robust commodity prices. These factors, coupled with emerging market earnings growth and an improvement in profitability, have helped to restore confidence.

Despite a period of superior performance, it is critical to highlight that emerging markets are rising from a very low base, and with a heavy valuation discount to developed market equities, the asset class remains attractive.

Policy developments across the major economies of the developing world bode well. In India, Modi’s reform agenda continues to progress. In China, aspects of government policy are encouraging, with environmental and state-owned enterprise reform amongst the areas to watch. The implementation of bold changes should drive greater economic stability over the medium to long term. More broadly, measures to address housing issues in India and far-reaching healthcare reforms in China could provide multi-year growth opportunities.

While the backdrop has improved, selectivity and discipline remains critical. I consistently focus on identifying companies with robust business models to maximise returns. Market leaders in their respective segments that can deliver sustainable earnings and cash flow are the most compelling opportunities. 

I still believe in the purchasing power of emerging market consumers, so I invest in many consumer-related businesses across a range of segments. IT is also an area where I am well exposed. I am marginally positive on the materials sector. Chinese policy is an area I will continue to monitor closely given that some of the companies I own in the portfolio should distinctly benefit from China’s efforts to cut excess capacity and curb pollution.

Omar Negyal, co-manager of JPMorgan Global Emerging Markets Income Trust (JEMI)

Dividends overall have been in decline in emerging markets for the past few years. Structurally things are positive but there are cyclical headwinds.

We are starting to see emerging market earnings improving, but the improvement in 2017 has been narrow. Markets have been driven by a few specific areas; for example Chinese internet has been a key area as this has shown earnings growth. This is not beneficial from an income perspective because these companies typically don’t pay dividends. However, in 2018 there should be an earnings improvement across a wider range of sectors and countries, and a broadening out in terms of market performance. We expect to see the underlying earnings of our portfolio companies start to improve.

Three areas in which I see good opportunities include Taiwan. We have very consistently tilted towards this market, which contains many stocks we like from a dividend perspective. Chinese mainland listed A-shares, meanwhile, are a much newer area of opportunity for us, but we can find many that fit what we are trying to do and that have good management teams to deliver dividends.

Russia is a valuation opportunity. This has been a laggard for a year or two, but we see some cheap stocks there so have added positions over the past year, as these look well set for 2018 and beyond. These include Sberbank (SBER:MCX), now one of our 10 largest holdings, which is the dominant banking franchise in Russia and has a good management team. Its strong capital position bodes well for dividend payouts to be increased, but this is being ignored by the market.

The most meaningful risk will be currencies because we can’t control the fluctuations. This is significant for the dividends we receive from our investee companies in local currencies and have to translate into sterling, so there is volatility in our revenues each year.

Overall we are quite comfortable with regard to emerging market valuations. They are not quite as cheap as they were – we have seen some re-rating – but they are still at pretty comfortable levels. And the trust’s dividend yield of around 3.6 per cent is well supported because of underlying profitability.

Gabriel Sacks, manager of Aberdeen Frontier Markets Investment Company (AFMC)

Asia seems like the most exciting place to allocate money in frontier markets and we have a big overweight there. The outlook for Vietnam is very strong, with good GDP and foreign direct investment growth. It is a hub for manufacturing with good infrastructure and a stable political environment, and there’s a big privatisation drive that could bring more investment opportunities. But finding the right companies in Vietnam is still challenging because it is a communist state and the businesses are not as open as in some other markets.

Places in Asia being overlooked include Pakistan and Sri Lanka, a big overweight for us. Pakistan has been upgraded to emerging market status, so a lot of frontier managers have sold their positions there and it’s not on the radar of many emerging markets managers. But from a growth perspective it’s still an attractive market – there’s a lot of infrastructure investment from China coming through. Despite all the news of security problems and power shortages, those issues are improving, so we see a stable and growing outlook for earnings.

In Sri Lanka, there have been a lot of structural reforms and that’s been impeding companies and preventing the market from doing well. But there are well-managed businesses that are looking cheap. In both Pakistan and Sri Lanka, a lot of our companies are trading on single-digit price-earnings ratios (PEs) and operating in an environment where growth is good. If you have good quality companies in that kind of environment you’ll see that in earnings, profitability and cash flow.

We hope that plays out in 2018, but it’s always difficult to say when markets will reward these companies while the political environment remains uncertain. But we think there is potential for these markets to do well, particularly if there is a better political reform story. 

Sub-Saharan Africa has been very tough, but you are finally seeing currency devaluations which will allow inflation to come down and the adjustment process to come through. This should eventually mean that central banks there can cut interest rates, which will be supportive for growth and the consumer environment in Africa. So places such as Egypt and Nigeria are on the cusp of a recovery in 2018. In Kenya, disruptive elections are largely done, and companies there are well managed and there is an entrepreneurial culture.

We are less excited about Argentina from a valuation perspective. The market has run very hard in the past few years and there are still only a few names to play. However, we have some investments listed there, for example BBVA Banco Frances (FRAN3:BUE). We like Argentina from a reform and growth perspective. But we think that's largely priced in, so are a bit cautious on valuations. But we may selectively invest where there are opportunities. There are probably going to be a lot of companies coming to market in Argentina over the next few years, so we'll keep an eye out for them.