Stock markets around the world

UK

Important information: The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

Investing in the UK has not been so bad after all


Source: Refinitiv, 30.9.21, rebased to 100 as at 3.1.00 (peak of dotcom bubble), total returns in local currency

%
(as at 30 Sept)
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
FTSE 100 11.2 6.1 3.2 -18.1 25.4
FTSE 250 14.3 4.9 1.2 -11.3 35.7
S&P 500 18.6 17.9 4.3 15.2 30.0

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.

It’s very important as investors to understand what we are looking at. If we are not careful, we can pick up entirely the wrong message. The performance of the UK stock market over the past 20 years is an excellent example of this danger.

The conventional wisdom says that investing in the UK has been a bit of a disaster in recent years and if you look at the divergence between the FTSE 100 and the S&P 500 in the chart you can see why people might have come to that conclusion.

Although UK and US shares tracked each other closely in the first dozen years after the peak of the dot.com bubble in 2000, they have parted company in the 10 years since the financial crisis. The divide has widened further in the recovery from the pandemic lows last year.

But when you add in a third line, representing the performance of the FTSE 250 mid-cap index, a rather different picture emerges. Yes, investing in the UK’s biggest companies has been hugely disappointing but it only tells part of the story. Smaller, more domestically focused, companies have matched the US market and then some.

The FTSE 100 is the UK stock market benchmark we all watch but arguably it should be put out to grass. It shows the performance of the biggest companies, but these are concentrated in a handful of sectors and they earn most of their profits in the rest of the world, not here in the UK. Just 24% of the FTSE 100’s sales are domestic, compared with 51% of the FTSE 250’s.

More than half of the value of the FTSE 100 is represented by commodities, financials and consumer staples. This was true in 2000 too, when an additional 30% of the index was in technology, media and telecoms (TMT) stocks. The weighting of TMT has dwindled to next to nothing as companies have been taken over or gone out of business while the other stodgy sectors have grown more important. No wonder the FTSE 100 has gone nowhere in two decades.

The FTSE 250, on the other hand, has risen more than 3.5-fold over the same period, outpacing the trebling in value of the S&P 500. You could have made good money investing in our home market but only if you ignored those big, boring businesses in the FTSE 100.

So, what should we take from this looking forward? To draw sensible conclusions, we need to look through the windscreen not in the rear-view mirror. In terms of valuations, the FTSE 250 looks more expensive than the FTSE 100 with a price that’s 17.7 times expected earnings versus 12.4 for the blue-chip index. But look at the forecast earnings growth and that looks more than justified - Goldman Sachs estimates that FTSE 250 earnings will grow five times faster than those in the FTSE 100 (53% vs 9%). And it’s worth pointing out that the FTSE 250 index’s valuation multiple is much lower than the 21.6 for the S&P 500.

Select 50 fund pick: there are nine UK funds on the Select 50 representing a wide spread of investment styles. The fund that is most obviously focused on the FTSE 250 index is the Threadneedle UK Mid 250 Fund. Before you invest in a fund, please ensure you have read Doing Business with Fidelity and the Key Information Document (KID).

Japan

Japan bounces back after a difficult summer

Source: Refinitiv, 30.9.21, rebased to 100 as at 30.3.21. Total returns in local currency

%
(as at 30 Sept)
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Nikkei 26.0 20.8 -7.8 8.7 29.1
S&P 500 18.6 17.9 4.3 15.2 30.0

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.

It’s been a testing summer in Japan, as the chart above suggests. Between April and August, the Nikkei 225 significantly underperformed other developed markets like the US, shown here. The principal reason was the country’s clumsy handling of the Covid pandemic, with vaccinations falling well behind comparable countries in the West. An unpopular Olympics and an even more unpopular Prime Minister completed the gloomy picture.

The recovery in the Japanese market in September reflected a belated improvement in the Covid situation and, in particular, the decision by Prime Minister Suga not to contest the recent contest for leadership of the LDP, effectively a resignation. His replacement Fumio Kishida is very much the continuity candidate, not the most popular outcome with younger, more progressive voters, but one that ensures more of the same in terms of policy.

On the economic front, things are looking up in Japan. Growth in the second quarter reversed the decline in the first and the rolling over of the fifth wave of the virus paves the way for a re-opening of the economy in the final quarter of the year. Vaccinations are now approaching US and UK levels after a hesitant start, so it is likely that we have seen the end of Japan’s states of emergency.

This should mean that Japan can once again start to benefit from its traditional cyclicality, doing well when activity picks up around the world. This is shown most clearly by the strong correlation between the Japanese stock market and US bond yields. Rising yields, reflecting improving economic activity, are good for the Nikkei so the recent uptick in the yield on the 10-year Treasury augurs well, as does the fall in the value of the yen versus the dollar.

Within the Japanese market there are plenty of interesting opportunities, particularly in the so-called re-opening plays. Most obvious of these are Japan’s railway companies, still 40% below their pre-pandemic levels and a clear beneficiary of people getting back to work.

The improving economic and political situation is being reflected in earnings forecasts, which point to a strong rise in corporate profits in the year to next March (up 37% according to Goldman Sachs). We should see some evidence of this in the October/November half year results season when Japan’s famously cautious companies will give some guidance as to the rest of the year.

Other reasons to be positive on Japanese shares include a clear valuation advantage. The slide since the spring has left Japanese stocks much cheaper than their US counterparts, and cheaper also than shares in Europe. The average price to earnings multiple fell by around 20% over the summer, a significant correction. Cautious overseas investors should start to take note.

All eyes now are on the general election later in the year. History shows that an outright majority by the winning party leads to outperformance in subsequent months. So, investors will be hoping for a clear result.

Select 50 fund pick: The three Japanese funds on the Select 50 all perform very differently as they adopt different styles. For investors looking for only one fund, we like the solid long-term performance of the Baillie Gifford Japanese Fund. Before you invest in a fund, please ensure you have read Doing Business with Fidelity and the Key Information Document (KID).

US

When is it right to start worrying?

Source: Refinitiv, 30.9.21. 

%
(as at 30 Sept)
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
S&P 500 18.6 17.9 4.3 15.2 30.0

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.

If you are of even a slightly nervous disposition, the chart here will give you pause for thought. The performance of the S&P500 over the past dozen years has been remarkable. The index has risen 4.5 times in 12 years. From the wreckage of the financial crisis, who would have imagined that?

If you look at the history of bull markets, the shape of this chart will also look familiar. Stock markets climb a wall of worry, grinding higher as investors slowly put their fears to one side. Then at some point in the process, they throw caution to the wind, the glass becomes half full and the trajectory of the chart moves closer to the vertical. Exactly the same thing happened towards the end of the 1982-2000 bull. The left turn happened in 1995 and the steeper line persisted for another four years.

On that basis, the good times might continue for a while yet and you can make a good argument that valuations are not yet at the eye-watering levels of 2000, especially when measured against the much more expensive bond market today. If so, then the very poor performance of the US market in September should be seen as just another pause that refreshes.

However, things do feel a bit different now. The list of things to worry about is lengthening. Top of that list is inflation. The Federal Reserve held its line that price rises were temporary for as long as it could but even the US central bank now seems to accept that there are elements of the inflation calculation that are more persistent than they would like. The move towards a $15 minimum wage signals longer-term wage growth. There are persistent upward pressures on US house prices as millennials look to buy. The green revolution is clearly inflationary.

Having accepted it underestimated inflation, the Fed has now come clean on its tightening programme. Almost certainly, asset purchases will be tapered in double quick fashion by the middle of next year and then the interest rate hikes will begin. These will probably continue through both 2023 and 2024. It remains to be seen how the market will respond.

At the same time, we have seen the peak in both economic and earnings growth. It is still positive on both fronts, but markets reflect changes in expectations rather than the absolute level of any measure. Earnings exceeded forecasts usefully in both the first and second quarters this year. They will struggle to keep repeating that trick.

There are positives too. The government is determined to press ahead with a hugely ambitious infrastructure spending programme. Household incomes have benefited from a generous Child Care Tax Credit package. Whether these can offset the drag of higher rates in an increasingly stagflationary environment is a moot point.

Finally, it is unclear that this changed balance of positives and negatives is adequately reflected in a stock market that has defied all expectations and now stands on a forward price to earnings ratio of nearly 22. That leaves little room for disappointment.

Select 50 fund picks: Even if the US looks expensive, a balanced portfolio will always have an exposure to the world’s biggest market. Our favoured funds remain the Rathbone Global Opportunities Fund, with its high US weighting, and the Brown Advisory US Sustainable Growth Fund. Before you invest in a fund, please ensure you have read Doing Business with Fidelity and the Key Information Document (KID).

Europe

Europe is bouncing back

Source: Refinitiv, 30.9.21.

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.

The outlook for Europe is good. The region is well placed to benefit from a pick-up in global economic activity due to its strong export sectors. Re-opening of economies as Covid is overcome will provide a domestic tailwind. The ECB is resolutely accommodative, insisting that the recent upturn in inflation is transitory.

Business was strong over the summer with services outperforming manufacturing for the first time since the start of the pandemic. Activity in August grew at one of the fastest rates in 20 years. The only problem for investors in the region is that the expectation of strong recovery has been baked into markets for many months now. The MSCI Europe index has been neck and neck with the US over the past year.

The performance has not been across the board, however, which provides opportunities for stock pickers. The gap between the winners and losers within sectors has never been wider. In the consumer sector, for example, L’Oreal trades on around 45 times earnings while Unilever is on just 18. If there is any kind of pull-back from the strong performance this year, some of the more expensive quality and cyclical stocks may look vulnerable.

This is an unusual market dynamic. These kinds of disparities have not been seen since the strange markets of 1999/2000. They make investing in Europe particularly risky today.

Select 50 fund pick: The Fidelity European Growth Fund has not performed particularly well this year as its ‘growth at an attractive price’ strategy has been out of favour. Any doubts about high valuations could see it perform relative well from here. Before you invest in a fund, please ensure you have read Doing Business with Fidelity and the Key Information Document (KID).

Asia and Emerging Markets

India - the jewel in Asia’s crown

Source: Refinitiv, 30.9.21, total returns rebased to 100 on the chart as at 1.1.92

%
(as at 30 Sept)
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Nifty 500 17.8 7.3 3.7 1.0 62.9

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in emerging markets can be more volatile than other more developed markets.

Chinese capitalism has always been different. The mistake Westerners may have made is to think that China would follow our model. And investors have always been well advised to treat the world as it is not as they would wish it to be.

Each regulatory squeeze in China is in isolation not so dramatic. The focus on e-commerce and internet companies is in many ways just playing catch up with privacy and data norms in the rest of the world. Likewise, the focus on education, property and healthcare - the so-called three mountains - should not be a surprise in a state that’s rediscovering its egalitarian roots.

What is hard for foreign investors is the pace of change, the broad front on which measures are being enacted and the difficulty in predicting where the axe will fall next. But that is how it is investing in China. Perhaps it is not the open goal it seemed in the past. You have to understand the messages coming out of Beijing and learn how to play the game. It’s a good argument for strong on the ground analysis and stock picking.

The rest of the region is a different matter. The Indian stock market seems to have shaken off Covid altogether. It has always been an expensive market and it is more so now. As an overseas investor the temptation is to go for quality. But the price tag for that is high.

ASEAN has so much potential, great demographics and loads of catch up potential. But the region is in the doldrums because of Covid and a slow vaccine roll-out. Valuations are cheap but a catalyst is lacking.

Select 50 fund pick: We continue to favour a pan-regional approach in this heterogenous part of the world. The Stewart Investors Asia Pacific Leaders Sustainability Fund is a good way into the region for long-term investors. Before you invest in a fund, please ensure you have read Doing Business with Fidelity and the Key Information Document (KID).

Fidelity uses cookies to provide you with the best possible online experience. If you continue without changing your settings, we'll assume that you are happy to receive all cookies on our site. However, you can change the cookie settings and view our cookie policy at any time.