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Our Equity Outlook: Priced for Perfection

Perspectives» |

October 24, 2017

Equity: Priced for Perfection

The positive economic momentum is still supporting earnings growth globally. The focus is now on the extension of the global cycle, which could further lift equity markets in the next few months, until we enter a more mature phase, which we expect to occur in 2018. With this transition in mind, we believe investors should start to address introducing a balance between cyclical and defensive themes, with a focus on quality stocks.


Europe

The market is pricing in a very benign scenario: strong economic growth translating into earnings growth, low inflation, no major surprises from central banks. While we remain constructive on EU equity markets for the coming quarters (with the earnings cycle still at an earlier stage than in the US), we believe investors should start to seek more balance between the cyclicals (industrial and consumer discretionary) and defensives (e.g., health care). Rising interest rates should continue to support the financial sector recovery and value themes. Some profit taking could be possible in areas that recently performed particularly well (i.e., Italian small caps).

 

United States

The expectation of long-waited tax reform in the US has been a trigger for a continuation in the reflation trade. This could drive a possible temporary outperformance by US vs European equities, despite less attractive valuations, even though the market, we believe, has gotten a bit ahead of itself in the short term. A reasonable deal on tax reform, in the first part of 2018 (now priced in for half of its potential), could positively play in two directions: first, lower tax for corporations, which could increase earnings in the coming years and have a positive impact on market valuations; second, foster the repatriation of foreign earnings. This could reduce capital inefficiency for many multinationals that have piled up cash, fostering investments, buybacks or dividends. Higher inflation could be supportive for banks.

 

Emerging Markets

In the last three months, we have seen an improvement in corporate fundamentals, with China, Brazil and Turkey showing double-digit upside revisions for corporate net income in the next 12 months. Globally synchronized growth, as well as benign financial conditions, remain supportive for EM equities. Selection, at country, sector and company levels, will become, in our view, more and more relevant going forward as we enter a phase of less accommodative monetary policy in DMs. We maintain our pro-cyclical bias in all three EM regions. Our preference goes to Asia over EMEA (here, we are positive on banks) and LatAm. Key risks to monitor are the unwinding of monetary policies next year and the situation regarding North Korea.

 

 

 

Important Information

 

Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of October 24, 2017.

 

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: October 24, 2017.

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Contributing Authors

Romain Boscher
Co-Head of Equities, Amundi
Diego Franzin
Co-Head of Equities, Amundi
Mauro Ratto
Head of Emerging Markets, Amundi

 
Ken Taubes
CIO of US Investment Management, Amundi Pioneer

 

Ken Taubes
Executive Vice President,
Chief Investment Officer, US
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