Stock markets around the world

UK

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Yield is still the UK’s calling card

Source: Refinitiv, 30.6.21.

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.

Of all the main equity regions, the UK has once again been the laggard during the first six months of the year. No-one will really complain too much about a 10% gain in half a year, but investors still can’t quite bring themselves to back Britain. Global shares are up 12%, as is Europe, while the US continues to lead the pack, up 14%.

Perhaps that is not surprising. While the UK has led the way with our impressive vaccine roll-out to a uniquely willing set of jab recipients, that good news story cannot completely disguise our other unique issue - Brexit. The first six months of life outside the EU have been overshadowed by the even bigger story of the pandemic, but the birth pains of global Britain cannot be hidden away completely.

As a pragmatic Remainer, I’ve always taken the view that we would find a way to muddle through Brexit. And that does look like the most probable outcome. Things are rarely as bad as we fear or as good as we hope and Britain’s half-baked relationship with Europe and the rest of the world looks like being neither a completely bad nor a wholly good thing. The economy will probably be smaller than it would have been, travelling will be more difficult and many businesses will wonder whether they are paying the price for an ultimately political project. But we’ll survive.

From an investment point of view, it is neither here nor there I suspect. The UK stock market is more global than domestic. And a well-balanced portfolio will anyway have no more than 10-15% invested in UK shares, I would suggest. The disadvantages conferred by Brexit - staff shortages, red tape, delays - are probably priced into a market trading more cheaply than its main rivals.

In terms of themes, the time has come to say goodbye to the re-opening story which has run its course. The big story over the coming months will be the progressive unwinding of pandemic-related stimulus (furlough, rent forgiveness), then a reining in of monetary easing, rising interest rates in due course and finally some fiscal retrenchment - in that order. Over time, UK portfolios should become more defensive and focused on long-term growth themes rather than short-term recovery.

The main attraction in today’s low-interest-rate world is the UK’s high and sustainable dividend culture. With bonds and equities more correlated, it is hard not to imagine money moving at the margin from fixed income into UK shares.

Select 50 picks: our two UK fund picks for 2021 have both done well, with Fidelity Special Situations edging Fidelity UK Select as investors played the re-opening trade. I wouldn’t be surprised to see that relative performance reverse in the second half, but it still makes sense to have exposure to both growth and value styles. We also like Artemis UK Select and Threadneedle UK Mid 250. Before you invest in a fund, please ensure you have read Doing Business with Fidelity and the Key Information Document (KID).

US

Thirty years of outperformance

Source: Refinitiv, 30.6.21. Total returns in USD

%
(as at 30 June)
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
S&P 500 17.2 14.0 9.5 -7.0 56.4
MSCI World 15.4 14.2 4.6 -9.9 54.8

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.

Hindsight is a wonderful thing, unfortunately unavailable to investors. What I would have given 30 years ago when I started writing about stock markets to have been able to see the chart above showing the performance of the US stock market relative to global markets as a whole. There has only really been one determinant of how well you have done as an investor over that period: how much exposure to the US have you had?

Actually, this chart probably underplays the outperformance by the US. Wall Street accounts for around half of the MSCI World index against which we are comparing it here. Part of the comparison is therefore with itself. Against the FTSE 100 over the same period, the S&P 500 has done twice as well. If you had invested £100 in the UK stock market in 1990 you would have around £300 today. The same amount invested in the US would have given you £1,200.

The two periods of massive outperformance in the past 30 years were, not coincidentally, periods in which technology stocks led the market higher- during the dot.com bubble years and in the post-financial crisis period. The bit in the middle when the US lagged the rest of the world was when investors had their eyes on China and the commodities it was sucking up as it cemented itself as the workshop of the world.

If we were able to look at this same chart for the next 30 years, what would it show us? If only we knew. History, and this chart, suggest that relative performance goes in cycles and that starting valuation is the best indicator of future returns. On that basis, I would be less bullish about US stocks today than I should have been three decades ago. Wall Street trades at a significant premium to other markets, however you measure it - against earnings, assets or dividends.

And yet, it is still easy to make a strong case for backing America. It leads in the industries of the future. It has demographics on its side. It is uniquely well-endowed with resources, space, people and entrepreneurial drive. Its political institutions have been tested in recent years and come through, a bit battered and bruised, but intact.

America’s response to the pandemic has not been perfect but it is largely open for business again. It is creating jobs and making profits. The US economy will probably grow at more than 7% this year. Earnings are forecast to be 63% higher year on year, albeit this is by far the most generous comparison with the worst of last year’s pandemic lockdown. It would frankly be a bit surprising if the US market were not rated a bit more highly than others around the world.

The risks to the US stock market are well understood. Inflation is clearly back on the radar; the only question is whether the rise above 5% is transitory, as the Fed believes, or something more entrenched. The longer-term worry is not that the Biden administration spends big but that it does so unwisely. The related concern is that the Federal Reserve repeats the mistakes of the 1970s, seeing only what it wants to see in the inflation data and falling behind the curve.

All of these are real concerns. But another risk is the one that more people have succumbed to over the years. Thinking that American leadership could not last. This is not the time to lose the faith.

Select 50 picks: There’s a good selection of US-focused funds on the Select 50. Sustainable growth is well catered for by one of our 2021 picks, the Brown Advisory US Sustainable Growth Fund. The JPM US Select Fund is another strong performer. We also like the Rathbone Global Opportunities Fund, which has an overweight to the US market. Before you invest in a fund, please ensure you have read Doing Business with Fidelity and the Key Information Document (KID).

Japan

Catching up after a slow start

Source: Refinitiv, 30.6.21, percentage of population who have received at least one Covid vaccination dose.

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. 

This has not been an easy year for Japan. Look at the vaccination charts, and the country stands out like a sore thumb. It has lagged far behind other developed nations in getting its people jabbed and that has been reflected in a testing fourth wave of infections and extended state of emergency and social restrictions.

There are good reasons for Japan’s slow progress in tackling Covid. Back in the 1970s a number of vaccination scandals led to a very high bar for drug approvals. Local trials are a requirement for foreign medicines, so getting US and European jabs to market has been a painfully slow process.

After a strong recovery in the second half of 2020, therefore, 2021 has seen the economy in retreat. GDP fell by nearly 4% on an annualised basis in the first quarter and the consensus for zero growth in the second three months to June may turn out to be a bit optimistic. Manufacturing is doing better than services but even here there has been a downturn more recently towards the 50 mark that separates growth from contraction.

All of this has been reflected in the performance of Japanese shares so far this year. Only the Chinese, struggling with a lack of stimulus, have fared worse as an East-West split has opened up in global markets.

From a corporate perspective, rising input costs pose a problem for Japanese companies, which tend not to pass rising raw material prices onto consumers for whom a lack of inflation is a given after years of stagnation. This means that margins could come under pressure.

On the other hand, Japan is particularly exposed to an uptick in global economic activity and we are seeing strong recoveries the world over. If there is a technical recession in the first half of 2021 it should be short-lived. A fall in the yen will also help. Many forecasts are premised on an exchange rate of 105 yen to the dollar and currently it is closer to 110. That makes a significant difference and the Nikkei index is always heavily influenced by the currency.

As ever, the reason to favour Japan is its undemanding valuation. On the basis of forecast earnings over the next 12 months, the Japanese market is significantly cheaper than both the US and European shares. The forward PE in Japan is about 14, versus 16 in Europe and 20 in America. When it comes to book value, the difference is even more pronounced - 1.3 times assets in Japan compared to more than 4 in the US.

The time to get interested in any market is when there is a mismatch between prospects and valuation. That disconnect is striking in Japan today.

Select 50 picks: The three Japanese funds on the Select 50 have very different styles. For value, the Man GLG Japan CoreAlpha Fund is the pick. Less cyclical is Lindsell Train Japanese Equity. For consistent performance through the cycle, we like Baillie Gifford Japanese. 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 is looking through its pandemic woes

Source: Refinitiv, 30.6.21, total returns rebased to 100 on the chart as at 30.6.16

%
(as at 30 June)
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Nifty 500 10.0 -2.3 19.3 55.0 109.2

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

It’s probably unhelpful to lump Asian and emerging markets together at the best of times but never more so than now. Take China and India, the two biggest markets. China emerged early from the pandemic; India is still very much in its grip. From an investment perspective, however, China has gone nowhere in the past six months while India has soared from an already expensive starting point.

The China story reflects its rapid recovery, in both market and economic terms, last year and the fact that Beijing has held back this year from the kind of stimulus that the West is still hooked on. There’s a regulatory angle too, with high-flying technology and internet stocks under increasing scrutiny. India, by contrast, goes from strength to strength, as the chart shows. Investors who were looking through the pandemic to earnings a year or two out are now blithely talking about what 2025 holds. It feels very frothy.

The other key story for emerging market investors is commodities, as there is a close correlation between the two. Despite the pull back in copper recently, the stars look aligned for some kind of commodity super-cycle. That’s good news for emerging markets. So too is the likelihood that the dollar will in due course reflect America’s rising deficits. A weaker US currency is generally beneficial for emerging markets.

Emerging market investing is not without risks. In some countries, debt to GDP ratios are too high for comfort. Until vaccines are shared more equitably around the world, the pandemic poses a persistent threat too. Inflation is a two-edged sword thanks to emerging markets’ commodity exposure. In terms of valuations, emerging markets look sensibly priced. The price-earnings multiple of the index is around 18 times this year, which is broadly in line with sales and dividend growth expectations.

Select 50 picks: Our favoured pick in the Asian region is the Stewart Investors Asia Pacific Leaders Sustainability Fund, which, as its name suggests, looks to invest in bigger, reliable companies that will benefit from the Asian growth story for years to come. Before you invest in a fund, please ensure you have read Doing Business with Fidelity and the Key Information Document (KID).

Europe

Only Europe and Japan will grow faster in 2022 than 2021

Source: Morgan Stanley Research estimates, July 2021

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. 

You have to go back 20 years to the end of the dot.com bubble in search of a time when Europe was the world’s best-performing stock market. Could this be its moment in the sun again? There is a reasonable case to be made for the region today. First, economic momentum in the region is as good as or better than anywhere else and recovery is less well advanced so should keep going after other regions have started to slow.

Europe is particularly exposed to a pick-up in global economic activity, given its strong export sector. This in turn is leading to good growth in earnings per share at the corporate level, perhaps 40% this year and another 15% in 2022. This will attract global investors, for whom Europe has long been very low on the list of attractive investment destinations.

Valuations are significantly lower in Europe than in the US. European shares have a further advantage in the complete lack of competitiveness of the region’s bond market. With bund yields in negative territory, shares look a much better bet. As recovery becomes entrenched, bond yields should head back to zero by next year. This should be viewed positively by investors and will be particularly good news for the region’s big financials sector. Europe tends to be a beneficiary of a more inflationary environment.

Select 50 picks: The Barings Europe Select Trust is a small and mid-cap focused fund, which might blend well with a fund looking for quality and low volatility like the Fidelity European Growth Fund. Both the BlackRock Continental European and Comgest Growth Europe funds have a focus on more defensive shares. Before you invest in a fund, please ensure you have read Doing Business with Fidelity and the Key Information Document (KID).

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