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.
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
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 500 450 400 350 300 250 200 150 S&P 500 MSCI Europe MSCI Emerging Markets 100 2009 2011 2013 2015 2017 +357% +204% +193% EVOLUTION OF 12-MONTH FORWARD EARNINGS ESTIMATES January 2013 to October 2017 18% 16% 14% 12% 10% 8% 6% 4% S&P 500 MSCI Europe MSCI Emerging Markets 2% 2013 2014 2015 2016 2017 +14.2% +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
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 2007 2009 2011 2013 2015 2017 0.0x 2007 2009 2011 2013 2015 2017 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
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 2017 75% 65% 57% Energy Materials Financials 10 8 6 3,400 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% 2 2003 2005 2007 2009 2011 2013 2015 2017 2,900-5% 2008 2010 2012 2014 2016 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-2016. MSCI EU earnings per share have increased by 29% over the past year and are expected to grow 30% in 2017. 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
Trillions of Yen Corporate Governance Improving in Japan As of September 28, 2017 APPOINTMENT OF OUTSIDE DIRECTORS Calendar Years, 2010 to 2016 100% 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 2017 18 Executed Buybacks 15 Dividend payout Total Capital Return to Shareholders 60% 40% 12 9 6 20% 3 0% 2010 2012 2014 2016 0 2002 2004 2006 2008 2010 2012 2014 2016 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
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 2017 200% 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% 2005 2007 2009 2011 2013 2015 2017 4% 2010 2011 2012 2013 2014 2015 2016 2017 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
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 2017 20% 15% 10% 5% Nominal GDP Growth Agriculture Contribution Old Economy* Contribution New Economy* Contribution 5.6% 5.2% 10 8 6 4 2 0-2 PPI, All Industry Products (L) Profits of Industrial Enterprises (R) 150 120 90 60 30 0-30 Year-Over-Year Change (%) -4-60 0% 2010 2011 2012 2013 2014 2015 2016 2017 0.4% -6 2010 2011 2012 2013 2014 2015 2016 2017-90 Concerns about the slowdown in China eased during 2016. 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
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: $13.625 Trillion $10,000 $8,000 Total Assets as of August 31, 2008: $3.446 Trillion $6,000 $4,000 $2,000 $0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 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, 2017. 9
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
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