2018: The View for International Equities
What is the backdrop for international equities as we enter 2018?
Â [It was a] very strong year for non-U.S. equities in 2017. Many would call this perhaps a relief rally that we didn't head into a massive global recession at the end of 2015 and 2016-- when we had a lot of fear around China's deceleration or the potential for a hard landing which did not happen. And so a lot of markets rallied led by emerging markets over the past year up north of 30%.
Now, there are a lot of macro risks that still remain. As we look around the world, certainly in Europe, the rise of populism and potentially nationalism-- as the result of-- the Syrian refugee crisis continues. And we are starting to see some political results that could cause eventually the end of the EU. Now, that is not our base case.
But as you look around what happened with Brexit-- certainly some threats in-- in France and Germany, a lot of concern that there are larger macro risks under the surface. As you go around the world to China, also concern that there could be impacts from decelerating growth there as well, as well as speculation about the data that we get from China. Nevertheless, we do feel that there is opportunity around the world in non-U.S. markets. We see some pockets of growth as well as opportunities and key themes.
Where are the key areas of opportunity in non-U.S. equity markets?
So the first opportunity is just a general one, and that is in terms of valuations.Â We do see meaningfully lower valuations outside the U.S. than currently we see in the U.S. equity markets. But in terms of key themes, and looking around the world, in China there's a significant investment in reducing the amount of pollution in their country.
And that investment is leading to increased economic activity and opportunities for private firms that specialize in that area. Secondly as we look at areas like India and Malaysia, we're seeing a rapidly maturing housing market, mortgage finance market, in general their financial system. And that is leading to a l-- a significant increase-- in their economic activity.
And lastly, the rise of luxury brands in Europe represents a significant opportunity. And we see this particularly among a number of smaller cap names. And speaking of smaller cap names, that is really the area of the non-U.S. equity market that we see perhaps the largest opportunity, both in developed markets and in emerging markets.
This is an area that is largely uncovered by Wall Street analysts. So it's a very inefficient market and ripe for research. But it's an-- also an area that has less ties to macro risks, the same macro risks we just discussed. And much more country-centric and more idiosyncratic risk, meaning they can be more insulated from those risks. So we're very bullish on smaller cap names for the next few years. But while also remaining vigilant about a lot of the risks around the world.
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