What to look for in equity markets as the business cycle ages

What to look for in equity markets as the business cycle ages

Michelle Zhu
13/09/17, 04:26 pm

SINGAPORE (Sept 13): With the emergence of renewed geopolitical tensions, the upward incline of equity markets have come to a halt in August, even after a strong earnings season for 2Q.

Nonetheless, Amundi Asset Management says the economic cycle remains sound and synchronised on a global level, and recommends that risk allocation favour equity over credit, with a focus on areas of the market which still retain a valuation gap.

“The [global] equity outlook is still constructive, driven by earnings growth and the positive economic backdrop,” note the asset manager’s chief investment officers (CIOs) Pascal Blanqué and Vincent Mortier in Cross Asset Investment Strategy (Sept 2017), the company’s monthly global investment views newsletter.

In Europe, Amundi notes a more tepid market environment over recent months, along with a notable uptick in earnings which have helped to dampen valuations with the MSCI Europe 12-month forward price-to-earnings ratio of about 14.5 times.

While this is above the long-term median valuation, Amundi’s equity team thinks there could be further upside which could help the region’s companies continue grow their earnings.

“We continue to seek balance, recognising that the potential for sectorial rotations remain prevalent within the [European] market. Our focus is on names which can deliver reliable earnings growth, which we believe will be the primary driver of upside,” says the team.

Amundi is in the view that the outlook for US equities is still constructive in terms of US large caps and value, although short-term risks to this asset class appear elevated when compared to a few months ago.

As it is, the asset manager believes a late stage of the global economic and market cycle is impending, while a domestic political stalemate, an issue of the debt ceiling, and geopolitical tensions threaten to weigh on the market.

While further upside could prove a positive surprise in the area of corporate tax reform in the US, Amundi thinks it unlikely to happen in the near-term.

It also deems US equity valuations reasonable compared with alternatives – although these remain high in absolute terms, especially for selected technology-related stocks and consumer staples.

Lastly, emerging markets (EM) are seen to continue benefiting from the synchronised global cycle and significant valuation gap with developed markets (DM) equities. The former could see a rotation towards cyclical sectors or industries should the positive global macro momentum persist, in Amundi’s view.

In particular, Asia continues to be a favourite area of Amundi’s equity team, which likes China for its reform momentum benefiting the cement and aluminum industries, export growth, and the resilience of real estate.

South Korea is also noted for its earnings growth and corporate governance improvements.  

“We do not see a broad risk [for equity markets] due to current valuations, but markets can be vulnerable to any disappointing news in an absence of strong positive catalysts. As the business cycle is ageing, especially in the US, a selective approach with more focus on value is favoured,” say Blanqué and Mortier.

“Earnings growth is the biggest theme in the market, but more catalysts are needed going forward,” concludes the asset manager.  

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