INTERNATIONAL EQUITIES

Transcription

1 2018 Global Market Outlook Press Briefing INTERNATIONAL EQUITIES Justin Thomson Portfolio Manager, CIO, Equity November 14, 2017 FOR 2018 GLOBAL MARKET OUTLOOK PRESS BRIEFING. PROVIDED TO DESIGNATED MEMBERS OF THE PRESS ONLY, NOT FOR FURTHER DISTRIBUTION.

2 Looking Ahead to 2018, In Our View Synchronized global growth will continue, but expectations are rising. Stocks are not cheap by historical standards. International stocks look slightly more favorable than stocks in the U.S. Earnings will continue to be an important driver of the aging global equity bull market. We expect stronger growth in Europe and EM. U.S. Fed continues to signal a gradual increase in interest rates. ECB will eventually begin to moderate. Global monetary conditions remain favorable overall, which is historically a bullish signal for stocks. 2

3 Index Level (100 = 3/9/2009) Analysts Estimates of Next 12-Month EPS Growth (%) Hope: Upside for Equity Returns Outside the U.S. REGIONAL MARKET TOTAL RETURNS March 2009* to October 2017, USD Total Return S&P 500 MSCI Europe MSCI Emerging Markets % +204% +193% EVOLUTION OF 12-MONTH FORWARD EARNINGS ESTIMATES January 2013 to October % 16% 14% 12% 10% 8% 6% 4% S&P 500 MSCI Europe MSCI Emerging Markets 2% % +11.0% +10.9% U.S. equities retain an enormous lead on the rest of the world during the post-financial crisis period. Recent earnings trends have fueled rallies in emerging markets and Europe. A weaker dollar and more stable commodity prices are good for emerging markets. Past performance cannot guarantee future results. *Begins on March 9, 2009, which was the low point for the S&P 500 during the financial crisis. Sources: FactSet, Standard & Poor s, and MSCI. Returns in USD. 3

4 Global Equity Valuations PRICE-TO-EARNINGS Next 12-Months, Last 10 Years 19x 17x 15x 13x U.S. Europe Japan Emerging Markets Peaks at 37.7x 18.0x 15.2x 14.8x 12.8x PRICE-TO-BOOK Trailing 12-Months, Last 10 Years 3.5x 3.0x 2.5x 2.0x 1.5x U.S. Europe Japan Emerging Markets 3.2x 2.0x 1.9x 1.5x 11x 1.0x 9x 0.5x 7x x Global equity valuations are broadly elevated with the U.S. near a 10-year high, but emerging market and Japanese valuations are modestly more attractive on a relative basis. Sources: FactSet, MSCI, Standard & Poor s, and T. Rowe Price. The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. 4

5 Last 12 months earnings per share Europe: Earnings Are Finally Rebounding, as Weakness in Energy, Materials, and Financials Fades EUROPEAN UNION: GROSS DOMESTIC PRODUCT (GDP) VS. EARNINGS January 2003 to October 2017, Figures Shown in Euros 12 MSCI EU Index EPS (L) European Union Real GDP (R) 3,600 3,500 MSCI EU INDEX: PERCENT OF EARNINGS FROM ENERGY, MATERIALS, AND FINANCIALS October 2008 to October % 65% 57% Energy Materials Financials ,400 3,300 3,200 3,100 Real GDP in Billions 55% 45% 35% 25% 15% 35% 4 GDP: 107% of pre-crisis peak Earnings: 62% of pre-crisis peak 3,000 5% ,900-5% Three sectors (energy, materials, and financials) have been responsible for much of Europe s earnings weakness in recent years. The down trend in these areas may have bottomed in mid MSCI EU earnings per share have increased by 29% over the past year and are expected to grow 30% in Past performance cannot guarantee future results. Chart is shown for illustrative purposes only and does not represent the performance of any specific security. Sources: FactSet, Haver Analytics, Statistical Office of the European Communities, and MSCI. 5

6 Trillions of Yen Corporate Governance Improving in Japan As of September 28, 2017 APPOINTMENT OF OUTSIDE DIRECTORS Calendar Years, 2010 to % 80% Firms that appointed independent outside directors Firms that appointed more than two independent outside directors JAPAN: CAPITAL RETURNED TO SHAREHOLDERS Calendar Years, 2002 to Executed Buybacks 15 Dividend payout Total Capital Return to Shareholders 60% 40% % 3 0% Governance has been improving thanks to four factors: Corporate Governance Code for companies, Stewardship Code for investors, JPX 400 Index based on ROE, and ISS voting guideline. Companies appoint more external/independent directors, cross-share holding is reducing, buybacks and dividends are increasing, and companies care more about ROE. Past performance cannot guarantee future results. Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Source: JP Morgan. 6

7 Emerging Versus Developed Markets Equity As of October 31, 2017 EM EQUITIES VS. ENERGY PRICES Cumulative Performance, January 2005 to October 2017 CENTRAL BANK RATES January 2010 to October % 150% S&P/GSI Energy Price Index MSCI Emerging Markets 18% 16% India Brazil China Russia 14% 100% 12% 50% 10% 8% 0% 6% -50% % Economic and earnings growth trends amongst emerging markets have improved and near-term risk of restrictive trade policies being implemented has diminished. Broad emerging markets growth is expected, supported by a return to growth of the large commodity-related economies of Brazil and Russia. The potential for a modest slowdown in China and lower energy prices continue to pose a risk. Low inflation across EM economies has contributed to higher real yields, providing flexibility for central banks to employ growth-oriented policies. While emerging markets remain at risk from a stronger U.S. dollar and higher interest rates, expectations for the pace of further Fed tightening are less pronounced following a series of low U.S. inflation reports. Sources: FactSet, MSCI, GSCI and T. Rowe Price. 7

8 Year-Over-Year Change in Nominal GDP (Not Seasonally Adjusted) Year-Over-Year Change (%) China is Still on Target for a Soft Landing CHINESE NOMINAL GDP GROWTH January 2010 to September 2017 INDUSTRIAL PRICES AND PROFITS January 2004 to September % 15% 10% 5% Nominal GDP Growth Agriculture Contribution Old Economy* Contribution New Economy* Contribution 5.6% 5.2% PPI, All Industry Products (L) Profits of Industrial Enterprises (R) Year-Over-Year Change (%) % % Concerns about the slowdown in China eased during After several years of sharply slowing, the industrial sector (old economy) has rebounded. The consumer sector (new economy), which accounts for more than half of GDP, has remained strong. Past performance cannot guarantee future results. *Old Economy is defined as the secondary sectors, which are principally industrial-related sectors, of the Chinese economy. New Economy is defined as the tertiary sectors, which are the service-related sectors of the Chinese economy. GDP = gross domestic product. PPI = producer price index. Sources: FactSet, Haver Analytics, and China National Bureau of Statistics. 8

9 Central Bank Assets, Billions of U.S. Dollars Fear: Peaking Accommodation From Central Banks CENTRAL BANK ASSETS 1 January 2005 to June 2017 $14,000 $12,000 United States Euro Area Japan Total Assets as of August 31, 2017: $ Trillion $10,000 $8,000 Total Assets as of August 31, 2008: $3.446 Trillion $6,000 $4,000 $2,000 $ Since August 2008, the three major central banks have increased their balance sheet assets by more $10 trillion (USD). This pillar of support is beginning to fade as central banks begin to move toward policy normalization. Sources: Haver Analytics, FactSet, U.S. Federal Reserve Board, European Central Bank, Bank of Japan, and People s Bank of China. 1 In U.S. dollars, based on exchange rates as of June 30,

10 Looking Ahead to 2018, In Our View Synchronized global growth will continue, but expectations are rising. Stocks are not cheap by historical standards. International stocks look slightly more favorable than stocks in the U.S. Earnings will continue to be an important driver of the aging global equity bull market. We expect stronger growth in Europe and EM. U.S. Fed continues to signal a gradual increase in interest rates. ECB will eventually begin to moderate. Global monetary conditions remain favorable overall, which is historically a bullish signal for stocks. 10

11 Important Information For 2018 Global Market Outlook Press Briefing. Provided to designated members of the press only, not for further distribution. This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction. Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price. The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. USA Issued in the USA by T. Rowe Price Associates, Inc., and T. Rowe Price Investment Services, Inc., 100 East Pratt Street, Baltimore, MD Unless otherwise stated, this material is issued outside of USA by T. Rowe Price International Ltd, 60 Queen Victoria Street, London EC4N 4TZ which is authorized and regulated by the UK Financial Conduct Authority. T. ROWE PRICE, INVEST WITH CONFIDENCE and the Bighorn Sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc. All rights reserved

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