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Global Investment Views: Equity - April 2018

Perspectives» |

April 3, 2018

Beyond the Noise

We are living now in a more volatile market phase. Factors behind it are switching from a fear of a rise in bond yields to a fear of peak momentum. Beyond the noise, the earnings outlook is still solid (no recession ahead) in our view, but positive economic surprises are needed for an imminent new lag of upside. Cyclicals are still outperforming defensives, with no major rotation of themes in the market yet. 


Europe

The market is in a broad trading range, with asymmetric price action during the earnings season (market over-penalising companies that did not meet targets and muted reaction for companies beating targets). This, we believe, is a sign of fatigue, where markets are getting nervous due to the current level of valuations. With divergent forces at play and elevated risk (trade talks, peaking momentum), a strong bottom-up focus is needed to identify companies more exposed to benign factors (domestic  growth stories). We believe investors should play the market with a focus on energy, banks, insurance and with a short bias on real estate, telecom and utilities. In the search for cheap defensive stocks, consumer staples (food/retail) may be interesting, as some companies are discounting a too pessimistic outlook. Small and mid-caps, more domestic and less impacted by tariffs talks, can provide good opportunities to play the European growth story.

United States

Fundamentals remain relatively strong across the US market. As we move from the first part of the Trump agenda (lower taxes and less regulation) to the second (trade), the road is likely to be bumpier.  Trade wars are at best neutral to earnings, more likely somewhat negative, but never positive. Critical points to watch are raw materials price increases, competitive pressures, and trade policy as an offset to the tax reform windfall. Most companies have signaled confidence in the ability to get enough pricing power to offset raw materials costs and wage pressures. However, at the top of the  agenda are logistics costs pressures: transportation costs are skyrocketing and some companies seem better positioned than others at managing logistics/ inventory. So, selection on this front will prove to be an important factor. In tech sector, cloud spending is the biggest tax reform beneficiary and should still support the mega cap outlook, even though these companies are not cheap in terms of valuation. While software and services continue to compound, the profit acceleration in semiconductors is noticeable, as the market is still valuing the industry as a deep cyclical even though the broadening of its end-markets suggests a more stable business cycle. We note that the market is still according too much of a discount to banks just as their business models stabilize, rates go up and regulatory pressure lessens. Again, bottom-up will be key in 2018, as multiple themes will get traction in the market.

 

Emerging Markets

EM equities retain a sizeable valuation gap with main DM equities. The dividend yield (4.2% for the high dividend MSCI EM index) is attractive and represents a way to optimize equity income exposure at a reasonable price. The asset class is also appealing on P/E ratios, which are close to historical lows, in absolute terms. The earnings outlook is also constructive: Q4 reporting season involved more than half of the index stocks and at the time of writing 4Q17 YoY growth (current reporting quarter vs the same quarter one year ago) is close to 20% in US$ confirming the positive momentum that we believe will remain in place in 2018. However, country/sector divergences persist: earnings revisions remain in general positive, with some exceptions (i.e., Mexico and Malaysia). At the regional level, we hold a

positive view on Latin American domestic-driven stories (i.e., Brazil), are selectively optimistic in EMEA (Russia), and maintain a positive outlook on Asian economies (China). We are now more  constructive on South Africa, due to the changing political framework.

 

GIC_Equity_4.4.18

Important Information

 

Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of April 4, 2018.

 

The views expressed regarding market and economic trends are those of the authors and not necessarily Amundi Pioneer, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Amundi Pioneer product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested.

This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any service.

 

Date of First Use: April 4, 2018.

 

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Contributing Authors

Ken Taubes
Chief Investment Officer, US, Amundi Pioneer

 

Diego Franzin
Co-Head of Equities, Amundi

 
Mauro Ratto
Head of Emerging Markets, Amundi
Ken Taubes
Executive Vice President,
Chief Investment Officer, US
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