In the first quarter of 2016, investors feared that weak conditions in many emerging markets, commodities and global manufacturing would deteriorate into a full blown recession across the developed world and China. As stock markets struggled, equity investors overwhelmingly preferred defensive stocks and gave an unusually generous discount to companies vulnerable to weak economic activity and low interest rates. But the recession never arrived.
Reduced fiscal austerity and continued easy monetary policy, coupled with greater confidence in the industrial sector and increased bank lending, have reignited global growth. Commodity prices have rallied, and the outlook for corporate profits now appears better than it has in several years. Though equity markets have moved quickly to price in the welcomed shift, we still see opportunities, especially outside the U.S., after many years of substantial returns for the S&P 500.
- The outlook for the corporate sector is improving, and near-term growth expectations are trending higher as markets price in a gentle move toward global reflation.
- Our equity analysts forecast synchronized double-digit earnings growth globally in 2017 and 2018 after two flat years in 2015 and 2016. In Europe, a six-year drought in profit growth is now coming to an end.
- Much of this expected improvement is already reflected in stock prices after strong gains since early 2016, but there is still room for stocks to move higher. After many years of out performance by U.S. equities, we are finding the most promising opportunities in emerging markets (EM) and Europe.
- Value investing has worked well in most markets over the past six months, leaving a diminished opportunity set, but we still find many attractive prospects in value stocks, especially financials.
- Among the potential risks we are monitoring: a slowdown in China, a “melt-up” in the U.S. dollar and, of course, politics.