EM equities outperform as growth outlook improves

Equities 4 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  Equity markets continue to rise as further evidence from OECD suggest the economy is rebounding led by Asia. Our current allocation view is to remain overweight Europe and EM equities, and underweight US equities. The earnings season starts this week and while EPS y/y will be another negative print investors will focus more on the outlook. We expect the technology sector to be the best performing sector in this earnings season.


We started the year with several predictions in 2020 and our current allocation view. One of our key views is to be overweight emerging market and European equities, and underweight US equities while staying selectively overweight the US technology sector. This allocation is based on two assumptions, 1) that equity markets behave according to history when the economy is a recovery phase and, 2) Europe will benefit more than the US from the rebound in Asia. So far, we have been right on EM equities outperforming US equities while European equities are a little behind. The rebound trade got more support today with South Korea exports y/y improving more than expected although the nominal figures are flat q/q.

Adding to the positive equities vs bonds trade is the OECD leading indicators released today revising some prior months data. The indicators are now suggesting that the growth momentum in the global economy bottomed in August last year and has been rebound ever since. This observation fits with this machine learning recession probability model that we are tracking. However, despite the recession probability has declined it still remains at 32% for the US economy within the next 12 months. But it looks increasingly like governments and central banks avoided a recession again. The cost short term looks small but the fallout will be a more leveraged system which imply a harder reset when the economy one day runs out of steam.

Equity valuations on the MSCI World Index rose to one standard deviation in December eclipsing the high from January 2018 and are now on par with the levels in 2007. US equity valuations are now at 1.2 standard deviations and now moving in on the levels observed during the dot-com bubble. What we are likely observing is the effect of investor expectations anchoring at very low interest rate levels in the long term. In this scenario, even a low growth economy, stable cash flows from stable companies will be bid up massively in price mimicking a bond with a credit and recession risk spread implied in the free cash flow yield.

While we do acknowledge various dangers to the equity market our view is that momentum remains strong. Implied equity volatility suggest more positive equity returns in the near term and investors are adding the least protection in option markets to protect the downside. This is positive short term but it also comes with the risk of a much larger drawdown when the equity market naturally resets temporarily.

The earnings season starts week and will be the fourth quarterly EPS decline y/y for US companies but the market is looking beyond that. As long as company outlooks start to improve and macro data on balance improve then equities will hold the line. We expect the technology sector to be strong during the earnings season together with financials and health care stocks.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.