Equities
Equities
A broadening out of the eurozone recovery would
help underpin earnings. On the other hand, we remain
somewhat sceptical that Abenomics would be able to lift
Japan’s longer term growth prospects.
US - The S&P500 reached new highs in June and valuations are
slightly above fair value with the trailing and forward PER around
18x and 16x respectively. We note that the US data surprise
series is currently at its highest in a decade, and a short period
of data disappointment cannot be ruled out. This could pose a
near term risk for the market.
US Data Surprise Index - 3 month rolling index
20
15
With our expectation that US bond yields would track
higher as inflation normalises and the search for yield
wanes, the tailwinds which the Emerging Markets have been
experiencing could potentially dissipate.
We continue to favour developed market equities over
emerging market equities. While the return of the search for
yield has taken the pressure off EM economies and markets,
they are not out of the woods yet. Notably trade growth is still
subdued and high levels of debt in selected countries limit
any significant domestic policy response to support growth.
As such, we see less certainty over the earnings outlook in the
emerging markets.
10
5
0
-5
-10
-15
-20
Japan - We remain somewhat sceptical that Abenomics will be
successful in raising investment levels and labour productivity.
Almost one year on, Japan’s exports do not appear to have
benefited from a weaker JPY. In fact, the converse may be true.
The trade balance has deteriorated, as the weak yen caused
energy imports to rise more sharply than exports. In addition,
Japan’s real export volumes have been flat over the past year
despite a weaker currency as Japanese producers continued
with their long-term strategy of shifting production offshore.
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Bloomberg. ANZ Global Wealth. June 2014.
However, over the medium term, the trend in economic
dataflow remains robust and is likely to lead to a gradual
improvement in sales volumes. Accordingly, the trend in
earnings revisions has turned positive and analyst earnings
growth expectations seem reasonable. Therefore, the US
continues to be one of our favourite equity markets over the
medium term.
Europe - While the headline PMI readings in the Eurozone
have softened somewhat in the past couple of months, the
new orders index has risen to a 3-year high, consistent with
growth of close to 2%. While this growth remains dominated by
Germany, the improvements in the business surveys across the
peripheral countries suggest that the recovery is broadening
out. Encouragingly, recent data and lending surveys suggest
that the credit shrinkage is moderating and that the appetite for
debt may soon pick up. This would be a positive for domestic
demand or at the very least, remove a major headwind for the
euro area, which would in turn help to underpin earnings.
Within Asia
Taiwan – The Taiwanese market remains one of our favoured
markets with its attractive valuations and positive earnings
trend. Its manufacturing sector is currently the region’s
strongest, with increases seen in output, new orders, including
new export orders in June. In addition, with inflation far below
the central bank’s target, rates are likely to be on hold for some
time, further supporting growth.
Korea – Our positive stance on the Korean equity market has
not been rewarded, with the market relatively flat year to date.
The downward earnings revisions since the start of the year
have clearly been a drag on the market as Korean exporters
faced significant competition, a situation not helped by
the s