In the medium term, the US market outlook remains positive, but with trade disputes and mid-term elections ahead, some volatility may emerge in the coming weeks. As European equities is the most unloved asset class following €40bn of outflows this year, any good news on known unknowns like Italy/Brexit/trade war would see a rally in the asset class. We believe that risks are now symmetrical, as the markets have already adjusted to these risks. Globally, the growth vs value ratio appears excessive, having reached end-1990s levels. Thus, the risk of correction is increasing. In our view, the best way to navigate this phase is to focus on quality stocks that seek to deliver sustainable earnings growth in the future and that are currently trading at reasonable prices.
Q2 earnings growth stabilised around 9%. The more favourable FX environment was balanced by higher input costs and weaker economic momentum. Earnings-wise, energy and real estate improved the most while consumer discretionary, telco and healthcare lagged. In Europe, we would play value with a strong quality focus, and balance cyclical and defensive exposures to continue to benefit from the still-positive economic backdrop. We would seek out sustainable business models that can continue to deliver solid earnings growth. Industrials, for example, offer some interesting late cycle opportunities, particularly in capital goods with a focus on attractive valuation opportunities.
Some noise in the short term is expected, as trade tensions intensify and US elections spur uncertainty. The medium-term outlook is still constructive and is supported by some healthy rotation in sectors and themes that occurred over the summer. The dominance of FAANG stocks in the first half of the year (+30.4% NYSE FANG+ Index in H1 2018 vs +1.6% for the S&P500) is now reversing (-4.3% NYSE FANG Index QTD vs +7.8% for the S&P500). Another possible rotation to come could be towards value. Valuation has not emerged as a positive factor for the past 12 months and its poor performance is on par with other notable inflection points in the market since 1990: tech bubble, housing bubble, Euro/Greek debt crisis, and the peak of the Trump trade situation. In each of these cases, there was a reversal of the performance of the valuation factor. We find the most value in capital goods, housing repair and remodel-levered stocks, banks, and telecom, and are cautious on tech/FANG. Areas of concerns are related to possible retaliation in trade disputes and the strength of the US dollar, which could impact the capital goods and transportation sectors. The flattening of the yield curve is also an area to watch: should it persist, it could negatively impact banks and trigger a review of the sector.
EM equity has been hit over the summer, with few significant exceptions, such as India, which has posted strong returns quarter to date. EM earnings per share revisions are deteriorating amid some challenges (trade disputes, FX spill overs) and country-specific stories in a context of expected moderate global economic slowdown. However, the selloff has been stronger than the deterioration in the earnings trend. This could pave the way for a tactical rebound in an overall scenario that requires cautious positioning. In terms of themes, we remain constructive on oil, due to politics related supply disruptions (Iran, Venezuela) and US shale logistics bottlenecks.
Chief Investment Officer, US, Amundi Pioneer
Head of Emerging Markets, Amundi
Deputy Head of Equity, Amundi
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Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of October 8, 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.
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