Monetary policy has turned more supportive for global equities: Major central banks, led by the Fed, have shifted more dovish and Chinese authorities have stepped up stimulus measures. This should gradually translate into firmer activity in coming quarters, leading us to take a more positive stance for the medium term. In the short-term however, markets are likely to remain volatile due to political uncertainties.
Eurozone equities upgraded to Overweight
EMU – The medium-term outlook is set to improve. Eurozone equities have been hit by weakness in manufacturing and slowing global trade. And the IBES consensus has been swift to revise down 2019 earnings growth estimates for the MSCI EMU, from 9.2% end-December to 6.1% now. Although further downgrades are possible, the net revision ratio picked up recently, suggesting that the process is well advanced. The medium-term outlook should improve, thanks to a weak euro, easier fiscal policy and more ECB support. In addition, this cyclical market should benefit from the stabilisation of the Chinese economy in coming quarters. Critically, valuation is attractive, especially compared to the US, and the high dividend yield (3.5%) looks appealing in a low rate environment. We have thus upgraded our view to Overweight. In the short term, a correction cannot be ruled out after the sharp bounce year-to-date – the market should remain volatile due to high political uncertainty (Brexit, EU elections) and lingering trade tensions.
Looser financial conditions are supportive
US - The Fed to the rescue. The Fed’s policy shift has helped to loosen financial conditions, a positive for equities in light of moderating US growth as last year’s fiscal boost fades. Indeed, earnings growth will decelerate sharply this year after two years of double-digit increases, hit by slower revenue growth and margin compression. The IBES consensus is for S&P500 earnings growth to slow from 24.1% in 2018 to 4% in 2019. Following the rally year-to-date, the price-to-earnings ratio (P/E) is back to its 20-year average, meaning valuation is not particularlyattractive.
UK – Brexit saga. At the time of writing, the Brexit deadline has been postponed to 12 April. If the threat of an imminent chaotic exit has receded, the outcome is still far from clear and the UK market could remain volatile. If a deal is reached, thereby easing political uncertainty, consumer confidence could rebound, and domestic stocks may well outperform exporters and multinationals – large British companies generate a significant share of revenues overseas, making them sensitive to swings in sterling. Overall, attractive valuations, a high dividend yield and better fundamentals in Energy (17% of the FTSE 100) argue for a sanguine view.
Japan – Mind the Yen. Monetary policy will remain easy for a long time to come, domestic demand is solid ahead of October’s planned VAT increase, valuation is attractive and stabilisation in China should help revive exports. However, EPS growth looks lacklustre and potential JPY strength in coming months is a headwind due to the highly negative correlation.
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