japanja
Calm in Storm: Beyond the trade war

Calm in Storm: Beyond the trade war

21-11-2019 | 年次アウトルック
Over the past year, regional equity market allocation has been heavily influenced by investors’ expectations on the outcome of the US-China trade war. We have nicknamed this ’pinball investing’, where, in reaction to a world of binary outcomes, equity markets have been bouncing off tweets in whichever direction makes more sense at the time. The trade deal is on, equity markets are up and risk-on trades outperform; the trade deal is off, equity markets are down and turn more defensive.
  • Fabiana Fedeli
    Fabiana
    Fedeli
    Global Head of Fundamental Equities

This is not only due to the fact that investors are a temperamental bunch. The outcome of the trade disputes has a significant impact on corporate earnings, arguably a key determinant of equity allocation. There still remains uncertainty surrounding the trade conflict, not only between the US and China, but to a large degree between the US and the rest of the world.

This, combined with the intellectual property disputes in information technology, is having an impact on economic activity and earnings across the globe: directly (through higher costs and lower revenues) or indirectly (as companies refrain from spending or investing more). Brexit has been the other topic at the forefront of equity investors’ minds, although its impact is by and large contained to the UK and Continental European equity markets. 

Depending on which one of our two scenarios (base case or alternative) develops over the next year, regional allocation in equity portfolios in our opinion should look very different.

This article is part of our investment outlook 2020: ‘A Tale of Two Scenarios’.
This article is part of our investment outlook 2020: ‘A Tale of Two Scenarios’.
Read more

Look outside of the US

Our base case scenario – with no hard Brexit and a slimmed-down version of a US-China trade deal; sufficient to bring back some business confidence, capital expenditures and corporate earnings growth – makes the case for equities outside of the US compelling. The current equity risk premium of US equities is at a 20-year low vis à vis Japan, Europe and emerging markets.

Arguably, US equity markets are discounting a world where US corporates are not only firing on at least most of their cylinders, but also where the rest of the world’s corporates remain far behind. However, a look at the current earnings expectations across major equity markets paints a very different picture. Markets outside the US have already priced in a lot of uncertainty, and earnings growth (or lack thereof) is now at levels that do not justify the wide disparity in valuations.

Take EM, with an expected earnings growth of 2.3% for 2019 and 13.4% for 2020, and a P/E of 13.2x and 11.4x, respectively. This compares with the US’s 2.3% and 10.5% 2019 and 2020 earnings growth and 18.6x and 16.9x P/E, respectively. For Japan, earnings are expected to fall by 0.9% in 2019 and grow 5.8% in 2020, while P/E is at 13.7x and 12.8x, respectively. Europe’s earnings expectations are for a 1.3% and 9.7% growth respectively, priced at a P/E of 14.8x and 13.4x.

Key driver for regional allocation

The relative earnings outlook is a key driver for regional allocation in equity markets. This is most evident in emerging markets, where their relative performance to developed markets over the long term has coincided with the forward earnings gap (see the graph below).

EM-DM forward earnings gap and relative price performance

Source: IBES, as of September 2019. GEM vs MSCI World represents the ratio of the MSCI Emerging Markets Index to the MSCI World Index.

Of course, for equities outside of the US to outperform, we need their earnings expectations not to fall below their current levels. A poor earnings environment would set markets back on the defensive and quality-seeking path into the arms of US equities. That macro improvement, that is part of our base case scenario, is therefore a key prerequisite to support earnings.

The case for outperformance of non-US equity markets becomes even more compelling given the persistent underperformance that we have witnessed over the last ten years, as shown in the following graph.

Global equity markets performance 2009-YTD

Source: MSCI (EM – MSCI EM Index; US – S&P; Japan – Topix; Europe – Euro Stoxx) 31 December 2008-30 September 2019

The alternative scenario: keep on hugging US equities

In our alternative scenario, which in our view is less likely, we have either no resolution or a meaningful setback in the US-China negotiations, the path to a US recession is already irreversible, and corporate earnings across the world weaken. Such a scenario would most likely bring back the risk-off stance, with global equity markets underperforming other asset classes and, within equities, the US market and more defensive bets most likely prevailing.

Depending on which one of our two scenarios develops over the next year, regional allocation in equity portfolios should look very different. In our base case scenario, the case for equities outside of the US is compelling, given relative earnings growth, valuations and prolonged underperformance. In this scenario, there is no hard Brexit and a slimmed-down version of a US-China trade deal, sufficient to bring back some business confidence, capital expenditures and a return of corporate earnings growth.

Our alternative scenario would most likely bring back the risk-off stance. Within equities, the US market and more defensive bets would probably prevail. That said, we see the risk-reward between the two scenarios as asymmetric. Further degeneration in either the trade war or Brexit is likely to cause a negative price reaction, the latter limited to the UK and Europe. But the upside to non-US equities that would be triggered by positive news at this point looks far greater.

Outlook 2020: A Tale of Two Scenarios
Download the full 2020 Outlook

重要事項

当資料は情報提供を目的として、Robeco Institutional Asset Management B.V.が作成した英文資料、もしくはその英文資料をロベコ・ジャパン株式会社が翻訳したものです。資料中の個別の金融商品の売買の勧誘や推奨等を目的とするものではありません。記載された情報は十分信頼できるものであると考えておりますが、その正確性、完全性を保証するものではありません。意見や見通しはあくまで作成日における弊社の判断に基づくものであり、今後予告なしに変更されることがあります。運用状況、市場動向、意見等は、過去の一時点あるいは過去の一定期間についてのものであり、過去の実績は将来の運用成果を保証または示唆するものではありません。また、記載された投資方針・戦略等は全ての投資家の皆様に適合するとは限りません。当資料は法律、税務、会計面での助言の提供を意図するものではありません。

ご契約に際しては、必要に応じ専門家にご相談の上、最終的なご判断はお客様ご自身でなさるようお願い致します。

運用を行う資産の評価額は、組入有価証券等の価格、金融市場の相場や金利等の変動、及び組入有価証券の発行体の財務状況による信用力等の影響を受けて変動します。また、外貨建資産に投資する場合は為替変動の影響も受けます。運用によって生じた損益は、全て投資家の皆様に帰属します。したがって投資元本や一定の運用成果が保証されているものではなく、投資元本を上回る損失を被ることがあります。弊社が行う金融商品取引業に係る手数料または報酬は、締結される契約の種類や契約資産額により異なるため、当資料において記載せず別途ご提示させて頂く場合があります。具体的な手数料または報酬の金額・計算方法につきましては弊社担当者へお問合せください。

当資料及び記載されている情報、商品に関する権利は弊社に帰属します。したがって、弊社の書面による同意なくしてその全部もしくは一部を複製またはその他の方法で配布することはご遠慮ください。

商号等: ロベコ・ジャパン株式会社  金融商品取引業者 関東財務局長(金商)第2780号

加入協会: 一般社団法人 日本投資顧問業協会

本記事に関連するテーマ: