singaporeen
This time it’s different: best opportunities outside of the US

This time it’s different: best opportunities outside of the US

26-04-2019 | Column
Since the beginning of the year, global equity markets have staged a swift comeback. For markets to rise further, we now need an improvement in fundamentals to follow and eventually feed through to earnings. The best opportunities are outside of the US as earnings growth differential between the US and other markets no longer warrants the wide disparity in valuations.
  • Fabiana Fedeli
    Fabiana
    Fedeli
    Global Head of Fundamental Equities

Speed read

  • Equity markets will need follow-through in earnings to rise further
  • We see green shoots that make us hopeful
  • EM best positioned driven by China, Japan will follow

Since the beginning of the year, global equity markets have managed to turn around the dismal performance of the final quarter of 2018. Year-to-date, the MSCI World is up almost 16% in US dollar terms and 17% in euro terms1. Notably, all major regional equity markets have kept up this pace, with the US just marginally ahead. The obvious laggard has been Japan, where an unfavorable USD/JPY exchange rate also contributed to the underperformance.

So, what’s next? Is this it? In my most recent conversations with clients, one recurring question has been: should we take profit from emerging markets after the rally? The question that I don’t get asked is: should we take profit from US equities and move it elsewhere? And while there seems to be an increased interest in specific markets such as China, the temptation to assume that the US equity market will continue to outperform as it has in recent years – while eventually the other major markets will fizzle out – is great.

We dare to utter the four most dangerous words ever spoken: “This time it’s different”. Let me rephrase that: “This time, it could be different, as long as a number of elements fall into place.”

Robeco Singapore Private Limited

12 Marina View 
#10-02, Asia Square Tower 2 
Singapore 018961 
Email: robecosg@robeco.com
Tel: +65 6909 6898

Contact

More opportunities outside of the US

What we believe will be different, is that there will be more opportunities for outperformance outside of the US. This does not mean that we expect the US equity market to collapse (if it did, it would take all other markets down with it), but simply that we believe that now that the sugar rush of President Trump’s tax cuts is over, the earnings growth differential between the US and other markets no longer warrants the wide disparity in valuations.

2019 IBES consensus earnings growth figures for the MSCI US, Europe and Emerging Markets are 4.1%, 5.5% and 6.8% and price/earnings ratios for 2019 are 17.2x, 13.6x and 12.1x, respectively. Of course, this is provided that earnings expectations outside of the US do not fall from the current levels and that the differential is maintained. This means that earnings revisions, which took a turn for the worse in all major markets during the last quarter of 2018, need to improve from the current levels.

The rally that we saw in 1Q was nothing more than investors realizing that the fourth quarter panic had caused stock prices to overshoot (on the downside) what was warranted based on fundamentals. The global economy was weakening, but not collapsing. And the dark clouds that were making the outlook appear even more ominous, namely a hawkish Fed and an escalation of the US-China trade conflict, did eventually dissipate.

Now, 16% later, markets have caught up with fundamentals. What we need now, is for an improvement in fundamentals to follow and eventually feed through to earnings.

Wide disparity in valuations no longer warranted

US-China and US-Europe trade deal

The first piece of the puzzle is a US-China trade deal. This is necessary for two reasons. First, because the start of negotiations has been an important pillar of the improved investor sentiment, and any negative news could reignite a bear market reaction. Second, because it would be a first step towards the reinvigoration of the weakened global economic activity. A good part of the global macro slowdown that we have witnessed in recent months has been due to the direct and indirect consequences of the trade dispute (as companies have either been directly impacted or have become more cautious with their spending plans).

Moreover, the trade deal does not need to be perfect, and it most likely won’t be. It just has to be good enough to scrap the tariffs that were imposed over the course of 2018. Any deal is likely to leave a lot of questions unanswered in the short term, whether they relate to the actual execution, the future of technology transfers, or any follow-through on a US-Europe trade deal. That said, none of those questions will have answers that could possibly be as bad for the global economy as the prospect of 25% tariffs on all goods traded between US and China.

Other pieces of a puzzle

Second, we need the world’s major central banks to continue to remain supportive, in other words, dovish. This is particularly important given the weak global macro backdrop. Take emerging markets, where equities have historically benefited from a strong growth outlook, regardless of the Fed’s stance (as was the case in the Fed tightening cycle of 2004-2006), but in a weak growth environment such as the current one, Fed support is a crucial element.

Third, we need the Chinese government to continue to gradually stimulate the domestic economy, managing the delicate balancing act between stimulus injection and debt management. We all understand that China’s economic growth will continue to weaken structurally, but as long as the government can manage the soft landing, investors will still be able to find compelling opportunities in the structural changes that are taking place in the country’s economy.

Of course, if the uncertainties surrounding the future of Europe, namely Brexit, the trade dispute between the EU and the US, and Italy’s woes were finally vanquished, that would be the icing on the cake. That said, we don’t want to be greedy and we feel that the markets should be able to cope with a bit more uncertainty on this end, as long as the other bigger boxes (China-US trade, central bank dovishness and China’s stimulus) are ticked.

Catalysts are lining up for emerging markets

We see all the required catalysts lining up for emerging markets, and some green shoots appearing. PMIs have started to improve in a few countries, namely China, Brazil and Indonesia, and earnings revisions seem to have reached a trough. Of course, we need to be mindful that emerging markets are not a homogeneous asset class, and some countries will fare better than others. China and Brazil are two that stand out in the current environment.

We believe Japan is next on the buy list, as some macro data is also taking a turn for the better, but earnings revisions remain weak. While we do find good investment opportunities in Europe and earnings revisions are also showing signs of having bottomed out, we see the risk of bouts of volatility ahead as markets look for clarity on Brexit, the US-EU trade talks and the trajectory of the Italian economy.

Neutral outlook on DM, positive on EM

Based on the above, our investment team maintains its neutral outlook on developed markets, while its outlook on emerging markets has turned positive. In our five-factor framework, the emerging markets team has upgraded the sentiment indicator. This is owing to the change in the monetary situation in the US and the more constructive US-China relations, which, in turn, has led to a significant recovery of fund flows.

The global equities rally in the first quarter of 2019 was about realizing that the global economy was not heading off a cliff. For investor sentiment to remain upbeat, markets now have to show signs of improving fundamentals. If the pace of improvement is not limited to the US and other markets manage to maintain at least the same momentum, valuations in emerging markets, Japan and Europe will offer more compelling opportunities. Then, this time it really will be different.

1 Total Return

Important information

This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation.
The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.
An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

Logo

Important Information

Warning/Important note: This website contains information which is only available to qualified investors as defined below. If you are not a qualified investor, please click “I Disagree” to leave the website.

By clicking on "I agree", I declare that: 

  • I am a qualified investor as defined under 1
  • I have read and understood the Terms and Conditions and Disclaimers as described under 2

1 - This website may only be accessed directly or indirectly by the following persons in Singapore:

1) “institutional investor” under section 304 of the Securities and Futures Act (Cap.289)(“SFA”), which means:
(i) the Government; (ii) a statutory board as may be prescribed by regulations made under section 341 of the SFA; (iii) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is (A) to manage its own funds; (B) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or (C) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country; (iv) any entity (A) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and (B) whose funds are managed by an entity mentioned in sub-paragraph (iii); (v) a central bank in a jurisdiction other than Singapore; (vi) a central government in a country other than Singapore; (vii) an agency (of a central government in a country other than Singapore) that is incorporated or established in a country other than Singapore; (viii) a multilateral agency, international organisation or supranational agency as may be prescribed by regulations made under section 341 of the SFA; (ix) a bank that is licensed under the Banking Act (Cap.19); (x) a merchant bank that is approved as a financial institution under section 28 of the Monetary Authority of Singapore Act (Cap.186); (xi) a finance company that is licensed under the Finance Companies Act (Cap.108); (xii) a company or co-operative society that is licensed under the Insurance Act (Cap.142) to carry on insurance business in Singapore; (xiii) a company licensed under the Trust Companies Act (Cap.336); (xiv) a holder of a capital markets services licence; (xv) an approved exchange; (xvi) a recognised market operator; (xvii) an approved clearing house; (xviii) a recognised clearing house; (xix) a licensed trade repository; (xx) a licensed foreign trade repository; (xxi) an approved holding company; (xxii) a Depository as defined in section 81SF of the SFA; (xxiii) an entity or a trust formed or incorporated in a jurisdiction other than Singapore, which is regulated for the carrying on of any financial activity in that jurisdiction by a public authority of that jurisdiction that exercises a function that corresponds to a regulatory function of the Authority under this Act, the Banking Act (Cap.19), the Finance Companies Act (Cap.108), the Monetary Authority of Singapore Act (Cap.186), the Insurance Act (Cap.142), the Trust Companies Act (Cap.336) or such other Act as may be prescribed by regulations made under section 341 of the SFA; (xxiv) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere; (xxv) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors; (xxvi) the trustee of such trust as the Authority may prescribe, when acting in that capacity; or; (xxvii) such other person as the Authority may prescribe.

2) “relevant person” under section 305(1) of the SFA, which means:
(i) An accredited investor; (ii) a corporation the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; (iii) a trustee of a trust the sole purpose of which is to hold investments and each beneficiary of which is an individual who is an accredited investor; (iv) an officer or equivalent person of the person making the offer (such person being an entity) or a spouse, parent, brother, sister, son or daughter of that officer or equivalent person; or (v) a spouse, parent, brother, sister, son or daughter of the person making the offer (such person being an individual).

3) any person who acquires the units [in a collective investment scheme] as principal if the offer is on terms that the units may only be required at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of units in a collective investment scheme, securities, securities-based derivatives contracts or other assets, and if the following condition is satisfied: (i) the offer is not accompanied by an advertisement making an offer or calling attention to the offer or intended offer; (ii) no selling or promotional expenses are paid or incurred in connection with the offer other than those incurred for administrative or professional services, or by way of commission or fee for services rendered by any of the persons specified in section 302B(1)(d)(i) to (vi) of the SFA; and (iii) no prospectus in respect of the offer has been registered by the Authority or, where a prospectus has been registered (A) the prospectus has eAccxpired pursuant to section 299 of the SFA; or (B) the person making the offer has before making the offer 1. informed the Authority by notice in writing of its intent to make the offer in reliance on the exemption under this subsection; and 2. taken reasonable steps to inform in writing the person to whom the offer is made that the offer is made in reliance on the exemption under this subsection.

4) Or otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

If you are not any of the types of persons described above, you are not authorized to enter this website and you should leave this website immediately.

2 Terms and Conditions
You acknowledge that you have read these Terms and Conditions (“Terms”) prior to accessing the website located at www.robeco.com/sg (“Website”) and you agree to be bound by the Terms.  If you do not agree to all of the Terms, you are not an authorised user and you should not use the Website. The Website is owned by Robeco Singapore Private Limited (company registration number: UEN. 201541306Z), which is licensed by the Monetary Authority of Singapore (“MAS”) pursuant to the Securities and Futures Act (Cap.289) (“SFA”) of Singapore, and is managed by Robeco Singapore Private Limited and/or its affiliates (collectively, as “Robeco”). The Website is intended for and should be accessed by institutional investors or accredited investors (as defined under Section 4A of the SFA) of Singapore.  The Website is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the Robeco to any registration or licensing requirement within such jurisdiction.  It is your responsibility to observe all applicable laws, rules and regulations of any relevant jurisdiction. The content contained in the Website is owned by Robeco and/or its information providers and is protected by applicable copyrights, trademarks, service marks, and/or other intellectual property rights.  You may not copy, distribute, modify, post, frame or link the Website, including any text, graphics, video, audio, software code, user interface, design or logos.  You may not distribute, modify, transmit, reuse, repost, or use the content of the Website for public or commercial use, including all text, images, audio and/or video.  Robeco may terminate your access to the Website for any reason, without prior notice. Neither Robeco, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from the access of the Website.  You agree to indemnity and hold Robeco, its associates, directors, officers or employees harmless against any and all claims, losses, liability, costs and expenses arising from your use of the Website due to violation of the Terms. Robeco reserves the right to change, modify, add or remove any parts of the Terms at any time and for any reason.  The Terms shall deemed to be effective immediately upon posting. The Terms shall be governed by, and shall be construed in accordance with, the law of Singapore.

Disclaimers
The Website has not been reviewed by the MAS. Accordingly, the Website may not be accessed directly or indirectly to persons in Singapore other than (i) to an institutional investor under Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), or any person pursuant to Section 305(2), and in accordance with the conditions specified in Section 305, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. 

Nothing in the Website constitutes tax, accounting, regulatory, legal or investment advice.  The Website is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation or for the purpose of soliciting any action in relation to Robeco’s businesses, or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer and solicitation. Any reproduction or distribution of information from the Website, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited.  By accessing to the Website, you agree to the foregoing.  

The funds referred to in the Website are for information only.  It is not a recommendation or investment advice, nor does it mean the funds is suitable for all investors.  The contents of the website is not reviewed by the MAS.  Any decision to participate in the funds should be made only after reviewing the sections regarding investment considerations, conflicts of interest, risk factors and the relevant Singapore selling restrictions.  You should consult your professional adviser if you are in doubt about the stringent restrictions applicable to the use of the Website, regulatory status of the funds, applicable regulatory protection, associated risks and suitability of the funds to your objectives.

Any decisions made based on the information contained in the Website are the sole responsibility of yours.  Any investments made or to be made shall be with your independent analyses based on your financial situation and objectives.  The investments and strategies contained in the Website may not be suitable for all investors and are not guaranteed by Robeco.  

Investment involves risks and may lose value.  Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future.  The value of your investments may fluctuate.  Past performance is no indication of current or future performance.  The Website may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies and such projection or forecast is not indicative of the future.  The information contained in the Website, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available on an “as is” basis and without warranties of any kind, whether express or implied, and reflects prevailing conditions and Robeco’s views as of the date published or indicated, and maybe superseded by subsequent events or for other reasons.  The information contained in the Website are accordingly subject to change at any time without notice and Robeco are under no obligation to notify you of any of these changes.  Robeco expressly disclaims all liability for errors and omissions in the information presented in the Website and for the use or interpretation by others of information contained in the Website.

Robeco Singapore Private Limited holds a capital markets services licence for fund management issued by the MAS and is subject to certain clientele restrictions under such licence.  An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

I Disagree