Outlook 2018: Potential for sizeable US correction

Europe

Valuations in Europe are attractive because of underperformance since the financial and sovereign debt crises. Sentiment is picking up against the backdrop of an accommodative central bank, according to Tom Stevenson, the investment director of Fidelity.

Whereas in previous years, Europe’s core would be where to focus investment, the current climb is across the board, so Stevenson believed that those that were hit harder in the Eurozone crisis, like Spain and Italy, may do reasonably well.

UK

The UK was the real laggard in 2017, compared to advances elsewhere. Stevenson though, is less negative this year. He expects the Brexit negotiations (which held back sentiment last year) to get more difficult, and growth to remain slow. However, the underperformance does mean valuations are now more attractive compared to Europe and the US. The yield is around twice what is available in other major developed markets, and even if dividends dip, stocks should remain attractive income wise.

Japan

Corporate Japan is becoming more investor friendly, Stevenson said, and inflation is picking up. The three arrows of prime minister Shinzo Abe’s economic growth policies are monetary easing, fiscal stimulus and structural reforms, aimed at countering the country’s lost decades.

The Nikkei 225 has more than doubled since Abe came to office, and is now at levels last seen in late 1991. Despite this, stock valuations are still not too stretched, the Fidelity investment director said.

China

In 2017 Chinese indices saw strong double-digit growth, but domestic A-shares have underperformed, and have much cheaper valuations than the likes of Alibaba and Tencent, Stevenson noted.