Focus on markets with decent valuations and good prospects
We remain constructive on global equities.
Eurozone and Japan best positioned to benefit from economic recovery.
US equities have little to offer – their valuations are already too stretched.
Brexit talks leave us increasingly cautious on UK equities.
Stay neutral on Swiss equities as they will benefit less than others from the global recovery.
Limited upside in the US
"Stretched valuations leave US equities vulnerable to rising interest rates."
Global equities – still constructive. In coming months, earnings are expected to continue to increase, albeit at a slower pace, while inflation is likely to edge higher. G4 central banks will drain liquidity and raise key rates only very gradually, led by the Fed. If the rise in long interest rates is equally gentle, the economic context will remain positive for risk assets.
US equities – limited upside. US equities will remain underpinned by sustained economic and earnings growth and still easy monetary policies. However, valuations are stretched: almost all metrics are at their highest level in more than a decade.
It is true that while valuation can help assess long-term equity returns, it is a poor predictor of short-term performance and markets can overshoot in late cycle. However, the prospect for wage-related inflation, Fed rate hikes – although normalization is expected to be gradual – and higher 10-year bond yields should weigh on valuations, limiting the market upside. With a forward price-to-earnings ratio of 18x, the MSCI USA is trading 27% above its 10-year median and 8% above its developed peers and its price-to-book stands at 3.1x versus 2.3x for the MSCI World. In addition, all the uncertainty about Trump’s pledged reforms and the Federal debt ceiling could dampen investor sentiment.
Eurozone and Japan still preferred
"We still prefer Eurozone and Japan given the ongoing economic recovery, better earnings and attractive relative valuations."
Eurozone – stronger earnings forecasts. Supported by the ongoing economic recovery and lower unemployment, the European Commission’s economic sentiment indicator hit a 10-year high in June. This bodes well for the profits of domestic and more internationally-focused firms. Against this background, analysts have continued to upgrade their earnings forecasts.
Limited price pressure will prompt the European Central Bank to stay ultraaccommodative for now and we expect no cuts in asset purchases before 2018. As a result, corporate financing conditions will remain favourable while valuations look attractive versus global equities. Sector-wise, we favour Consumer Discretionary and Financials (see theme page 12).
Japan – beyond Abenomics. Japanese equities will be supported by stronger earnings growth, rising wage inflation and solid external demand. Economic growth is now better balanced thanks to a recovery in both consumer spending and business investment. Deflation risks have receded thanks to higher wages coming from a tighter job market and labour reforms. And that’s not all – recent improvements in corporate governance will help enhance return on equity, company fundamentals (low net debt-to-total assets ratio) are sound and valuations compelling.
Sources: SG Private Banking, Datastream. 15/06/2017. 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.