Differences have increased as idiosyncratic stories, but the US market is re-approaching historical highs. Earnings are up, also owing to strong growth. Divergences should remain in place in the coming months, softening next year when some of the one-off US EPS growth will be over.For Q3 and Q4, the earnings outlook is constructive for global equities in the context of sound growth, and the rise of the trade in a trade war.The US continues to focus on growing EPS growth and improving relative valuations (thanks to EPS growth).As the mature cycle, stock picking will remain crucial,
The outlook remains moderately positive, but with some vulnerabilities. The Turkish crisis could impact EU banks, which have around 150 billion of USD in Turkey. Even if this is not a problem for their balance sheets, from a P&L perspective a jump in provisioning could dent their results and affect MSCI Europe EPS growth. The recent weakness of the EUR/USD is supportive, but this tailwind should prove temporary (until Q1 2019). In trade weighted terms, the depreciation versus the USD was balanced by an appreciation versus EM currencies.
The US market is enjoying one of the longest bull markets in history, but this is not enough to call for an imminent turning point. The economy is growing nicely, small business optimism is solidly close to an all-time high and capex plans are solid. The earnings boom incorporates the tax reforms effect, which added about 8% to this year’s EPS growth. The outlook for earnings is still positive for 2018 and 2019. However, we believe that a “quality check” to the portfolios is warranted at this stage, as well as the implementation of more defensive strategies (such as reduced stock/sector concentration or increased focus on valuations and lower volatility). This year most of the S&P’s performance is explained by a few sectors (IT, consumer discretionary and energy) and the breadth of the market is decreasing. Areas we view as needing attention are the IT sector, which is exposed to possible retaliation measures just when the growth/value ratio is stretched globally, the strong USD appreciation, which could hurt more global exporters, and the near flat yield curve. Approaching the US mid-term elections, we expect some political noise, but an overall positive backdrop.
The recent sell-off improved valuations and, if there is no more negative news on the growth side, EM equity could rebound a bit from its depressed levels. In the last quarter, we revised downwards EM EPS forecasts to a range of 5-9% (versus the previous 6-11%) for FY2018 and we are more conservative than the consensus. We remain prudent on the asset class, with some challenges ahead. World trade growth is set to decelerate for 2018 as well as EM exports, idiosyncratic political uncertainty is high (Brazil/South Africa/Turkey) and there is uncertainty on US policies. On the positive side, we see the commodity outlook as favourable. As investment ideas, we like Greece and oil-related themes. We are also positive on China as most of the concerns on economic slowdown or on trade tensions seem to be priced in, valuations are very compelling, and we see policy reaction supporting the economy.
Chief Investment Officer, US, Amundi Pioneer
Head of Emerging Markets, Amundi
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