Slowly earnings but supportive policy mix
With global earnings growth in low single digits, equity performance has been driven by rising valuations so far this year, in marked contrast to 2018. In geographic terms, we prefer the UK over other developed markets and still suggest underweighting emerging markets (EM).
US. Despite demanding valuations and a sharp slowdown in earnings growth, US equities have continued to outperform global peers year-to-date, even during August after the US announced planned tariffs on all imports from China. According to consensus estimates, earnings growth is set to slump to 2% this year from 24% last year, meaning that rising equity prices are almost entirely due to higher valuations.
However, US equities continue to be attractive compared with other asset classes – the S&P500 yield is now higher than that on 30-year UST for the first time since early 2009. Moreover, the US market is in a strong uptrend. Overall, we remain neutral.
Eurozone. Export-sensitive euro zone economies such as Germany continue to see weakness in manufacturing confidence surveys and, although consumer spending and services are brighter, earnings growth expectations for this year have slumped to barely 1%. However, euro zone equities are supported by a 3.7% dividend yield, a welcome source of income with so many government bonds offering negative yields. Nonetheless, euro zone equities will struggle to outperform the US as long as Brexit and the trade war remain key concerns for investors.
UK. Despite the boost to competition brought by the fall in Sterling, UK equities continue to struggle against European peers. The fog surrounding the government’s Brexit plans has caused many international investors to shy away. Unsurprisingly, earnings growth is barely positive. However, valuations are below their 10-year median and a 5.1% dividend yield looks compelling against the 0.4% available on 10-year gilts. Moreover, the market remains in an uptrend, and surrounded by negative sentiment: all factors that support our Overweight position.
Japan. Japanese equities are not without their attractions. Corporate governance is improving, domestic growth is still positive, valuations are well below their 10-year median and the market yield is well above the US (2.7% versus 1.9%). However, the impending VAT hike and the impact of yen strength on exports suggest caution is warranted.
Emerging Markets. After keeping pace with most developed markets apart from the US, emerging market equities have underperformed as slowdown and trade war worries have raged. In addition, high-profile problems in Argentina and Turkey – although idiosyncratic in many ways – have dampened investor enthusiasm. Moreover, earnings growth has slumped to low single digits while the price-to-earnings ratio remains some 12% above its 10-year median. All in all, an Underweight stance remains warranted.
US equities have continued to outperform year-to-date, even during August after the US announced planned tariffs on all imports from China. However, valuations are rich. We remain Neutral.
Despite low earnings growth expectations, euro zone equities are supported by high dividend yields. We remain Neutral.
With an uncertain Brexit outcome and weak profit growth, many are overlooking attractive valuations, historically high dividends and a large-cap index largely insulated from domestic geopolitics. We are Overweight.
Valuations are well below their 10-year median. However, the impending VAT hike and the impact of yen strength on exports suggest caution is warranted.
Emerging market equities have underperformed as slowdown and trade war worries have raged. Moreover, earnings growth has slumped to low single digits. We are still Underweight.
Source: Kleinwort Hambros 04/09/2019
*Duration: short = Up to 5 years, medium = 5-7 years, long = 7+ years
Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest.