Protectionism and geopolitical tensions between the US and the Middle East could be the most high profile reasons to throw stocks into a downturn over 2018.
That is according to Franklin Templeton’s Coleen Barbeau, who is a Citywire AA-rated global equity manager at the group.
‘A more protectionist US trade policy and potential changes to the North America Free Trade Agreement could bring new economic uncertainty into the global economy,’ she said.
In addition to this, Barbeau, who runs the Franklin Global Growth fund alongside AA-rated Donald Huber, said the US’s decision to pull out of the Iran nuclear deal or a ratcheting up of tensions in the Middle East, with Iran and Saudi Arabia's vie for greater influence, could also have dire consequences for the region and investor sentiment.
‘For these reasons, we think 2018 may be a more challenging year for stocks overall. However, we believe it can create greater opportunities for individual stock selection.’
Barbeau currently has 44.4% allocated to the US but said non-US companies with compelling secular growth stories and competitive advantages can stand out regardless of how the broader markets perform over the course of the year.
‘The US market is looking the most expensive to us at a time when US corporate earnings are already well past their prior peaks.
‘Many other markets are less expensive, but more fairly valued on a historical basis and will need to see a significant pickup in earnings growth to continue their run. With the US market having gone more than a year without a major correction, we see the heightened potential for the advance to falter.’
With 27.7% allocated to the IT sector, Barbeau said stocks in this area have benefited from optimism around the global economic recovery and improving corporate earnings.
‘We’ve also seen ebbing political and policy fears. The populist impulse that characterized 2016 looks to have receded. In 2017, a number of world leaders from Chancellor Angela Merkel in Germany to Prime Minister Shinzo Abe in Japan won re-election.
‘As economic conditions have continued to improve in Europe and parts of Asia, we have seen markets outside the United States push into the lead. Emerging markets also began to outperform in 2017, amidst sturdy growth in China and India and a turnaround in Brazil.’
Barbeau said the team thinks the global economy can continue to hum along with economic overall growth likely to remain steady in 2018.
‘Based on projections, we think the US is likely to see solid growth, low inflation, and limited wage growth, while in Europe the economic expansion can become further entrenched.
‘Growth in China may weaken modestly amidst a slowdown in the property market and government investment,’ she added.
Over the three years to the end of December 2017, the Franklin Growth fund returned 27.15% in US dollar terms. This compares with a 37.25% rise by its Citywire-assigned benchmark, the MSCI World Growth TR USD, over the same time period.