Janus Henderson Investors
January 16, 2018
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2018: Prime for Stock Picking?

In this video, Adam Schor, Director of Global Equity Strategies, shares why with multiples at fair levels, companies that can drive earnings growth through their own business models are better positioned to outperform in early 2018. Learn why he believes volatility and international markets may present additional opportunities.

To learn more about our equity viewpoints, read our latest Global Sector Views .

I think we are starting 2018 with multiples at fair levels, you know, not extraordinarily high, but there is no reason to think they are going to go any higher. So therefore, your returns are going to come from earnings growth. And we think, in this environment, even with some good economic growth, it is going to be the companies that can really drive earnings growth through their own business models, through their own success, that will be able to grow faster than the market and therefore get returns better than the market.

I think 2017 was a transition. Before 2017, we had a lot of earnings growth driven by leveraging your balance sheet, paying higher dividends, buying back shares, doing special payouts. 2017 we started with environment, somewhat thematic with this Trump Trade and then we kind of settled into the environment I just described. I think in 2018, it is more about economic power, not financial engineering, and about business models.

It means that stock picking is going to matter more. It means you have to have deep insight into what changes are happening at your sector and at your company level. And it ultimately means that active investing is much more powerful than it has been in the past.

We don’t think valuations are extreme. With that said, we have a multi-year period of rising markets. And we understand that people are concerned about another positive year in equity. The question then is what breaks that confidence, and it could be corporate earnings, it could be political events, it could be some economic bad news that really jolts the market, and a little bit could go a long way when we have this high level of nervousness. Now we think the fundamentals long term are strong and one bit of news, one company report, one economic report isn’t going to change the long-term outcome. So some of that volatility could be opportunity. But it is reasonable to think we could have a choppier market as we have an edgier market going into the rest of this year.

We think international markets are attractive as well. We see Europe’s economy growing a couple of years behind the pace that we are seeing in the U.S. and companies getting more confident and beginning to invest more and that is good for stocks in Europe. China is continuing its long-term, but stabilizing transition in its economy, so China looks good. And in fact, most of Asia is coming in with decent earning results and again, corporate confidence that we think could drive strong equity returns globally.

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