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LONDON, Nov 13 (Reuters) - A tech-led rally in global equities should now broaden out to other sectors in 2018 and spur high single-digit returns, Schroders' head of multi-asset investment Europe said on Monday.
Aymeric Forest told Reuters' 2018 Global Investment Outlook Summit that a backdrop of low inflation and relatively easy credit, synchronized economic expansion and looser government fiscal policies in many areas supported further earnings-led gains.
Forest, who runs several portfolios across emerging and developed markets for the British asset manager, which invests 430.2 billion pounds ($562.27 billion) in client money, said in turn this should lift stock-to-stock correlation and by extension market volatility.
"It's very much IT first (at the moment). We believe if we have a broader participation in this growth, it would help the rally continue," Forest told the summit, held at the Reuters office in London.
While the best gains had already been made after a 'V-shaped' economic recovery from mid-2016 until the end of 2017, stock markets could add another 7-8 percent to earnings growth next year simply by recovering to trend growth globally.
"The two areas where earnings growth seems to be the highest for 2018 are still emerging markets and the U.S., although there is potential for a positive surprise in Europe," Forest said.
While he had started positioning portfolios to profit from such a move on an expectation that broader earnings growth would prompt investors to buy into relatively cheaper stocks, the contrarian move had raised questions among some investors.
Chief among the risks is a higher-than-expected increase in U.S. inflation, particularly if the market is given too-much stimulus.
"There's a lot of debt in the world, so you want interest rates to normalize steadily, you want inflation to recover steadily; you don't want large shocks."
"For me, that would be the biggest risk ... no-one expects inflation to accelerate," Forest said. The other risk would be a "reaction from Trump" on trade policy with countries in Asia, the main focus for Forest's emerging market exposure.
Schroders' Emerging Multi-Asset Income Fund was almost maxed out on its equity allocation at 66 percent, Forest said, but had started trimming local currency debt exposure since the summer, moving into higher-quality debt with shorter duration.
With a number of elections planned for 2018 and political risk high in countries like Turkey and South Africa, the fund was more focused on currencies from countries with a more stable profile such as Indonesia, India and Malaysia.
A recent wobble in markets that had prompted outflows from some high-yield bond index funds was an important reminder of the need to research the issues each held - especially in a late-cycle environment where corporate leverage was high.
"Sprint, for example, is a very (large) weight in the U.S. high-yield market. You need to do your homework on Sprint; are you happy to own it? It creates a better case for active management, especially on the credit side."
One financial instrument Forest said he had no plan to buy was cryptocurrency such as bitcoin, which were "totally outside of our mandate."
With no investment rationale other than speculation, it was impossible to follow a process to determine when to buy or sell.
"In order for us to invest in something, first we have to understand it, second how to value it. If it's just driven by pure speculation, it doesn't go into our investment universe."
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($1 = 0.7651 pounds) (Additional reporting by Jemima Kelly; Editing by Richard Balmforth)