Global Investment Outlook

Transcription

1 PRUDENTIAL INTERNATIONAL INVESTMENTS ADVISERS, LLC. Global Investment Outlook November 2013 Financial Market Outlook: Stocks Rebound with U.S. Debt Deal, Fed QE Taper Delay, Yellen Nomination, Low Rates Through 2014, GDP & Earnings Recovery, Fair Valuations & Easing Middle East Tensions Bond Yields under Renewed Upward Pressure with Improving GDP Growth & Easing Risks in Italy, Syria & Iran. Yield Rise Limited with Fed QE Taper Delay, Central Banks continue Bond Buying & Low Inflation John Praveen, PhD Chief Investment Strategist John Praveen s Global Investment Outlook November 2013 expects global equity markets to fully recoup the late September/early October losses with a last minute Washington agreement to extend the debt ceiling, avoiding a debt default and ending the U.S. government shut-down. Further stocks remain supported by Fed QE Taper delay and Fed policy likely to remain highly accommodative under new Chairperson Yellen. GDP and earnings recovery remains on track despite the brief U.S. government shut-down, while risk appetite should increase with easing of Middle East tensions and political uncertainty in Europe. Stocks: Global equity markets enjoyed a solid rally in September with Developed Markets gaining 3.5% and Emerging Markets up 4%. Stocks corrected in late September/early October with the U.S. Government shut-down and risk of a debt default and U.S. debt rating downgrade. However, stocks rebounded with an agreement on a short-term extension of the U.S. debt ceiling and re-opening of the U.S. government. Looking ahead, equity markets are likely to fully rebound from the late-september/early October decline and post further gains as stocks remain supported by: 1) Interest rate and liquidity tail winds persisting with the Fed delaying QE Taper and rates remaining low through 2014; 2) Global GDP and earnings recovery remains on track despite the brief U.S. government shut-down; 3) Valuations remain supportive; and 4) Improving risk appetite with easing of Middle East tensions and the Letta government surviving a confidence vote in Italy. FOR MORE INFORMATION CONTACT: Theresa Miller Phone: theresa.miller@ prudential.com Bonds: Bond yields are likely to come under renewed upward pressure from: 1) GDP growth in the U.S. and Eurozone on track to strengthen in H2, while growth remains solid in Japan; 2) Easing risks in Italy, Syria and Iran; and 3) Bond valuations remain expensive relative to stocks. However, the rise in yields is likely to be limited by: 1) The Fed unlikely to begin QE taper before December or Q Fed policy likely to remain accommodative for an extended period under new Chairperson Janet Yellen; 2) Other developed central banks remain committed to keeping interest rates low for an extended period and continuing bond purchases; 3) The U.S. government shut-down is expected to depress U.S. Q4 GDP growth by 0.5% to 1%; 4) Low inflation in the developed economies. 1 *Prudential International Investments Advisers, LLC. (PIIA) is a business of Prudential Financial, Inc., (PFI), which is not affiliated in any manner with Prudential plc, a company headquartered in the United Kingdom. For informational use only. Not intended as investment advice. See Disclosures on the last page for important information.

2 Market Outlook: Stocks Rebounding with U.S. Debt Deal, QE Taper Delay & Yellen Nomination, Low Rates Through 2014, GDP & Earnings Recovery Despite U.S. Shut-Down, Fair/Attractive Valuations & Easing Risks in Middle East & Europe Bond Yields Under Renewed Upward Pressure with Improving GDP Growth & Easing Risks in Italy, Syria & Iran. Yield Rise Limited as Fed Delays QE Taper, other Central Banks continue Bond Buying & Inflation remains Low. Stock Market Outlook (November 2013): Global equity markets enjoyed a solid rally in September with easing of Syria tensions, Summers withdrawal and the Fed delaying the start of QE taper. Stocks posted a relief rally in early September as the threat of the U.S. military strike against Syria abated with prospect of a Russian brokered diplomatic solution. In mid-september, stocks enjoyed a Summers rally after former Treasury Secretary Larry Summers withdrew his name from consideration for Fed Chairman s position to succeed Bernanke in January Market perception was that the Fed under Summers could accelerate the QE Taper, hence, his withdrawal brought relief that QE taper is likely to be gradual and measured. Finally, stocks surged with the Fed surprising markets by not starting QE taper at the September 17 meeting. Stocks gave up some of the gains in late September on profit taking and on fears of a U.S. Government shutdown with Republicans and Democrats refusing to negotiate. Stocks also declined due to rising tensions in Italy and coalition uncertainty in Germany. In Italy, the fragile Letta coalition government faced the risk of collapse due to the Berlusconi conviction/immunity saga. In Germany, while Chancellor Merkel s CDU/CSU coalition won a resounding victory in the September elections, the smaller coalition partner FDU failed to secure the 5% vote threshold to qualify for seats in the Bundestag. As a result the Merkel coalition is looking for a coalition partner from the Opposition SPD or Green Party resulting in a period of prolonged negotiations and uncertainty about the new German government. The developed market (MSCI World ) index rose 3.6% (LC) in September, taking Q3 gains to 5.9% and YTD gains to 16.9%. The U.S. (S&P 500) gained 3.2%, Japan rose 7.7% and the Eurozone gained 6.3%. For Q3, the developed market index gained 5.9%. Emerging markets outperformed developed market stocks for the second consecutive month gaining 3.6% (LC) in September after -0.3% in August. Emerging market stocks rose on strengthening commodities and energy prices, easing of China hard landing fears and easing of fears about capital flows with the Fed delaying QE taper in September. Emerging Markets gained 4.9% during Q3, trimming YTD losses to just -1.7%. Stocks markets corrected in early October as Washington dysfunction resulted in a shut-down of the U.S. Government and risk of a debt default increased with the October 17 deadline for hitting the debt ceiling. However, markets recovered as the Congress and White House agreed on a short-term extension of the debt ceiling, averting a debt default, for now. Markets were also supported by the nomination of Janet Yellen as the next Chair of the Federal Reserve. In Japan, the Abe administration announced an increase in the consumption tax (VAT) to 8% (from 5%), effective April 2014, the first tax increase since In addition, PM Abe announced a JPY 5trn ($50 bn), 1% of GDP, stimulus package to offset impact of sales tax increase. The stimulus package is likely to include public works spending and tax breaks to boost capital spending. Abe feels Japan recovery is on a good enough footing to withstand the tax hike in 2014, but the fiscal stimulus is an insurance. Markets were disappointed as Abe dampened expectations of labor market reforms, indicating that relaxation of current job protection measures would not be part of the policy package to be unveiled soon. In Europe, Italy pulled back from the brink as Prime Minister Letta s fragile coalition survived confidence vote with last-minute U-turn and support by Berlusconi. However, in Germany, Chancellor Merkel is still in negotiations to find a coalition partner. Through mid-october (17th), the Developed Market index is up 19.2% YTD, while the Emerging Market index is up 1.5%. 2 For informational use only. Not intended as investment advice.

3 Looking ahead, equity markets are likely to fully recover from the late-september/early October decline with the Washington agreement to extend the debt ceiling and avoiding a debt default and ending the government shutdown. Stocks remain supported by interest rate and liquidity tail winds, GDP & earnings recovery, fair/attractive valuations and improving risk appetite. Interest Rate & Liquidity Tailwinds Persist as Fed Unlikely to Start QE Taper till late 2013/Early Yellen Fed Likely to Keep Fed Policy Accommodative for an Extended Period. Low Interest Rate Regime to Continue through 2014: The Fed is unlikely to start QE taper in October, given the disruptions to economic activity due to the U.S. government shutdown. Earlier, the Fed surprised markets by deciding not to start QE taper in September and continuing the pace of bond purchases at $85 billion. The minutes of the September meeting indicates that the Fed is divided and that several members remain concerned about softening in housing and labor data. At this stage, it appears that the earliest plausible date for starting QE taper is December, with a high probability of delay into Q Another positive for markets is the nomination of Janet Yellen as the next Fed Chair which suggests that Fed policy will remain highly accommodative for an extended period. The ECB left Eurozone policy interest rates and forward guidance unchanged in October. The Bank expects Eurozone growth to improve, but acknowledged that the recovery remains slow and uneven with downside risks. The ECB remains sanguine about deflation risks despite Eurozone inflation at post-crisis low of 1.1% in September, well below ECB 2% target. President Draghi kept options open, noting that the ECB remains open to additional stimulus, expanding the LTROs, if necessary. The BoE left the bank rate at 0.5% and the stock of asset purchases fixed at 375bn. The BoE maintained forward guidance that it will not consider tightening until the unemployment rate falls to 7% (currently at 7.7%). The BoJ left rates on hold at its October meeting. The BoJ is likely to increase its reflation measures to offset the impact of the 2014 consumption tax hike. Some Emerging central banks continue to tighten to fight inflation and defend currencies (Brazil, India), and others on hold (China, Korea, Taiwan, Turkey, Russia). However, stabilizing currencies are likely to provide room to stop tightening and some EM CBs could even unwind the tightening measures and cut rate to boost growth. GDP Growth remains on Track to Improve in H2 despite U.S. government shut-down speed-bump: The global recovery hit a mild, temporary setback as the U.S. economy hit a speed-bump with the government shut-down. However, Japan growth remains solid while Eurozone and U.K. are on track to strengthen in H2. U.S. GDP growth is estimated to have slowed in Q3 to around 2% from 2.5% in Q2. GDP was on track to strengthen to over 2.5% GDP pace in Q4 with solid contributions from housing, rebound in consumer spending and fading sequester drag. Consumer confidence, ISM manufacturing confidence, Industrial Production posted a solid reading in late Q3 pointing to good momentum in the economy. However, the government shutdown is expected to take a toll on consumer confidence and spending with government workers furloughed, depress business confidence and spending. The shut-down is also expected to depress government spending. Q4 GDP is now expected around 2%, with risks to the downside, depending on how long the shutdown will last. The Eurozone economy remains on modest growth path after emerging from recession in Q2 with GDP growing 1.1% with contribution from both domestic demand and net exports. Business confidence continues to improve with Manufacturing PMI above 50 in September (51.1). The ECB expects Eurozone growth to improve, but acknowledged that the recovery remains slow and uneven with downside risks due to still large macroeconomic and fiscal imbalances. U.K. GDP growth is expected to improve further in H2 after Q2 GDP growth was revised up to 2.9% (from 2.4%). Japan s GDP growth is expected to remain solid driven by public and private capex. The Abe administration announced an increase in the consumption tax (VAT) to 8% (from 5%), effective April 2014, and stimulus package of JPY 5trn ($50 bn, 1% of GDP), to offset the impact of sales tax increase. The stimulus package is likely to include public works spending and tax breaks to boost capital spending. Consumption spending is expected to strengthen in Q4 ahead of the tax increase in For informational use only. Not intended as investment advice.

4 Emerging markets growth is on track to improve in H2 with a pick-up in developed economies growth and easing oil prices. Strengthening of exports from China and Korea is a positive for emerging market growth. However, while exports are likely to continue to recover, the risks that have impacted emerging economies recently remain, causing the likely recovery to be a shallow one. China's Q3 GDP grew 7.8% YoY in Q3, up from 7.5% in Q2 with strong investment and consumption growth. Meanwhile, exports were a drag on growth. Taiwan s GDP expected to rise 2.5%, while Korea is expected to grow 3.1% in Q3. Brazil s economy is expected to grow 2.5% and Mexico around 1.3% in Q3. Stock Valuations Rise in September on Equity Market Gains: Stock market P/E multiples rose during September after declining in August with equity markets posting solid gains during the month. P/E multiple for the Developed Markets inched higher in Q3 to 16.7X from 16.4X in Q2 and 15.6X in Q1. While valuations have been under upward pressure from strong stock gains, stronger than expected earnings results have moderated the rise in equity P/E multiples. In addition, P/E multiples remain well below long term averages. EM stock valuations rose modestly during September after remaining stable in the previous two months. EM stock valuations have improved since the beginning of the year due to the decline in EM stocks and continue to trade at a discount to Developed Market stocks given their underperformance YTD. Earnings Growth Outlook Remains Solid Supported by Improving GDP Growth: Global earnings outlook remains solid with earnings growth expected to improve in H and over 2014 driven by improving GDP growth. U.S. Q2 earnings season finished on a strong note up 5% and is on track to improve further to around 8% in H2. Eurozone earnings are expected to recover with the economy coming out of recession. Japan earnings are tracking a strong 64% in 2013 driven by solid GDP growth and weak yen. Emerging Markets earnings outlook has been revised lower to around 7% for 2013 due to the weak H1 GDP growth but still expected to improve with GDP recovering in H2. Bottom-line: Looking ahead, equity markets are likely to fully recoup the late-september/early October losses with the Washington agreement to extend the debt ceiling and avoiding a debt default and ending the government shut-down (or likely to end soon). Stocks remain supported by: 1) Interest rate tail winds persisting with the Fed continuing QE buying and Taper unlikely to begin before December or may be pushed into Q Further, the nomination of Janet Yellen as the next Fed Chair suggests that Fed policy will remain highly accommodative for an extended period. Other central banks continue QE buying and also remain committed to keeping rates low for an extended period. The BoJ is likely to increase its reflation measures to offset the impact of the 2014 consumption tax hike. Emerging central banks that have been tightening to address elevated inflation and defend weak currencies may unwind the tightening measures and even cut rates to boost growth as their currencies stabilize; 2) The global recovery remains on track despite the U.S. hitting a speed-bump with the government shut-down. However, Japan growth remains solid while Eurozone and U.K. are on track to strengthen in H2. Japan s GDP growth is expected to get a boost from the Abe administration s fiscal stimulus package (to offset impact of sales tax increase) and front loading of consumption spending ahead of the tax increase in April 2014; 3) Earnings outlook remains solid with improving GDP growth in the U.S., Europe and Emerging Economies and continued solid growth in Japan; 4) Valuations remain supportive and multiples remain below long-term averages, especially after the late September/early October decline; 5) Political stability in Europe with a new lease of life for the Letta government in Italy and Chancellor Merkel finding a new coalition partner in Germany; 6) improving risk appetite with easing of Syria military strike risk and a thaw in U.S.-Iran relations. However, market volatility is likely to remain elevated with: 1) While a U.S. debt default has been avoided and shutdown ended, for now, Washington dysfunction continues and another destabilizing episode of the serial debt ceiling crises likely to occur in early 2014; and 2) Uncertainty about the new German government with prolonged negotiations by the Merkel CSU/CDU coalition to find a partner. 4 For informational use only. Not intended as investment advice.

5 Bonds: Yields Under Renewed Upward Pressure with Improving GDP Growth & Easing Risks in Italy & Syria. Yield Rise Limited as Fed Delays QE Taper, other Central Banks Buying Bonds & Low Inflation Global bond yields declined in September after rising steadily in July and August on expectations the Fed beginning QE Taper in September. However, with the Fed deciding to delay the start of QE taper in September, yields unwound part of rise. Further, bonds were supported by safe haven demand with Washington dysfunction resulting in a U.S. government shut-down and the risk of a U.S. debt default with the October 17 deadline for hitting the debt ceiling. Looking ahead, bond yields are likely to come under renewed upward pressure from: 1) GDP growth in the U.S. and Eurozone on track to strengthen in H2, while growth remains solid in Japan; 2) Easing risks in Italy, Syria and Iran; and 3) Bond valuations remain expensive relative to stocks. However, the rise in bond yields is likely to be limited by: 1) The Fed unlikely to begin QE taper before December or Q Fed policy likely to remain accommodative for an extended period under a Yellen Fed; 2) Other developed central banks remain committed to keeping interest rates low for an extended period and continuing bond purchases; 3) 3) The U.S. government shut-down is expected to depress U.S. Q4 GDP growth by 0.5% to 1%; and 4) Low inflation in the developed economies. Investment Strategy: Increase Equity Overweight as Stocks Rebounding with U.S. Debt Deal, Fed QE Taper Delay, Low Rates Through 2014, GDP & Earnings Recovery Despite U.S. Shut-Down, Fair Valuations & Easing Risks Asset Allocation: Stocks vs. Bonds Stocks Increase Overweight: Equity markets likely to fully recoup the early October losses with Washington agreement to extend the debt ceiling, avoiding a debt default and ending the shut-down. Stocks supported by Fed QE Taper delayed, other central banks committed to keeping rates low for an extended period. The global recovery remains on track despite the U.S. government shut-down. Earnings continue to improve while valuations remain fair for developed markets and attractive in the emerging markets. Risk appetite improving with easing of uncertainty in Italy, and tensions in Syria and Iran. Bonds Keep bonds at underweight as yields likely to come under renewed upward pressure from: 1) GDP growth in the U.S. and Eurozone on track to strengthen in H2, while growth remains solid in Japan, & 2) Easing risks in Italy, Syria and Iran. However, the rise in yields should be limited as the Fed delays QE Taper, other CB s continue asset buying and inflation remains low in the U.S. (1.5%) and Eurozone (1.3%). Global Equity Markets: Remain Modest Overweight in Japan, Eurozone & Emerging Markets. Remain Neutral in U.K.; Remain Modest Underweight in U.S. stocks on Washington Dysfunction Eurozone: Remain Modest Overweight with improving H2 growth after recession ended in Q2, easing of Italy risks & continued ECB support. Japan: Remain Modest Overweight on solid GDP growth with Abe fiscal stimulus to offset drag from 2014 consumption tax hike. Yen rise a risk. Emerging Markets: Remain Modest Overweight with GDP improving and currencies stabilizing, Fed delays taper & relatively attractive valuations. UK: Remain Neutral with Q2 GDP growth revised up (2.9%) and solid momentum in Q3. BoE commits to keeping rates low, but no fresh stimulus. 5 For informational use only. Not intended as investment advice.

6 U.S.: Remain modest underweight as U.S. likely to underperform other equity markets with continued Washington dysfunction despite debt deal, government shutdown taking a toll on Q4 GDP. Fed taper delay a positive. Global Bonds: Yields likely to remain under Upward Pressure as Improving GDP Growth offsets Fed Delaying QE taper Eurozone bonds: Remain Overweight as growth remains modest with imbalances persisting, low inflation, ECB support and easing Periphery risks. US Treasuries: Modest Overweight with low inflation, downside risks to GDP growth due to government shut-down and the Fed QE taper delay. EM Debt: Modest Overweight on renewed capital flows with Fed QE Taper delay, modest GDP growth & easing inflation in many EMs. Japan JGBs: Remain Neutral as yields likely to be under pressure with solid GDP growth boosted by Abe stimulus, rising inflation expectations. U.K. Gilts: Remain Underweight as yields under pressure from relatively higher inflation and solid GDP growth, further BoE stimulus unlikely. Global Sectors: Modest Overweight: Industrials, Healthcare, Financials, Info. Technology Neutral: Energy, Materials Underweight: Consumer Discretionary, Consumer Staples, Telecomm Services, Utilities Currencies: Overweight: Euro & Sterling Neutral: Japanese Yen, EM Currencies Underweight: U.S. Dollar Follow us on Twitter: Disclosures: Prudential International Investments Advisers, LLC. (PIIA), a Prudential Financial, Inc. (PFI) company, is an investment adviser registered with the Securities and Exchange Commission of the United States. Pramerica is a trade name used by PFI and its affiliated companies in select countries outside of the United States. PFI, a company incorporated and with its principal place of business in the United States of America is not affiliated in any manner with Prudential plc, a company headquartered in the United Kingdom. The commentary presented is for informational purposes only, and is not intended as investment advice. This material has been prepared by PIIA on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information. All opinions and views constitute judgments of PIIA as of the date of this writing, and are subject to change at any time without notice. There can be no assurance that any forecast made herein will be realized. Distribution of this information to any person other than the person to whom it was originally delivered and to such person s advisers is unauthorized and no part of this material may be reproduced or distributed further without the written approval of PIIA. These materials are not intended for distribution to, or use by, any person in any jurisdiction where such distribution would be contrary to local law or regulation. The companies, securities, sectors and/or markets referenced herein are included solely for illustrative purposes to highlight the economic trends, conditions, and the investment process, but may or may not be held by accounts actually managed by PIIA. The strategies and asset allocations discussed do not refer to any service or product offered by PIIA or by its affiliates The global asset and strategy allocation models presented are hypothetical allocation models shown for illustrative purposes only, and do not necessarily reflect the management of any actual account. Following the allocation recommendations presented will not necessarily result in profitable investments. Past performance is not an assurance of future results. Nothing herein should be viewed as investment advice to adopt any investment strategy, nor should it be considered an offer to provide investment advisory or other allocation services Prudential Financial, Inc. and it related entities. Prudential, the Prudential logo and the Rock symbol are service marks of Prudential Financial, Inc. and it related entities, registered in many jurisdictions worldwide. 6 For informational use only. Not intended as investment advice.