An improving world economy calls for equities exposure
For global equities, 2013 is likely to be a year of high-single- to low-double-digit returns.
The stimulus measures of the G4 central banks and the modest recovery of the world’s largest economies are creating conditions that bode well for stock investments. Our regional chief investment office explores the best ways to position in global equities.
The world remains in the midst of the long, deleveraging cycle that started in 2007. Excess private-sector debt built up over the past decade has been transferred to the public sector, and reducing this debt to sustainable levels is a long and painful process.
However, we are optimistic that the world economy will continue to improve and gain a stronger footing in 2013, trending closer to its long-term historical average. The need to rebuild public balance-sheets in the developed world will likely continue to dominate the investment landscape, with the G4 central banks playing an active role in buying policymakers more time through accommodative monetary conditions.
US recovering faster, Europe still healing
However, growth is not widely distributed and there are sharp disparities between regions. In the US, economic growth remains constructive amid a recovering housing market, expanding energy production, easing credit standards, improving labor markets, and supportive monetary policy. Despite the across-the-board "sequester" budget cuts that took effect in March, we expect US GDP to grow by around 2% in 2013.
In the Eurozone, uncertainty surrounding the debt crisis, fiscal austerity, and deleveraging will likely keep growth barely positive in 2013. The Eurozone economy is expected to lag, and recent data show large regional divergences.
While German business sentiment has improved, the outlook for the French economy remains weak as France catches up with its neighbors in fiscal tightening. Meanwhile, Italy could take to the polls again after the general election in February left the country without a clear leader, reigniting the political uncertainty in the Eurozone.
Chinese locomotive continues to run
At the other end of the political spectrum, China’s leadership transition was completed in March without much ado. The economy remains on an uptrend, supported by strong credit growth and rising exports. The 7.9% GDP growth in the last quarter of 2012 reaffirmed what we have stated before: that the economy has entered a phase of normalized growth, weak external demand, changing demographics, and rising labor costs, all proving to be structural hurdles. In our view, the bigger challenge for China lies not in the slowing external demand, but rather in whether it can transform the economy from one that is driven by fixed-asset investment, to one that is more balanced, with domestic consumption as the other notable growth engine.
Nonetheless, we expect stronger growth and better corporate earnings in 2013, especially in the next couple of quarters, when corporate earnings should catch up with the economic recovery on the back of improved aggregate demand and moderate inventory restocking. At the same time, government policy should be overall supportive, with no major shifts. We also expect structural reforms to gain traction, with a focus on income redistribution and urbanization.
Current environment positive for global equities
For global equities, 2013 is likely to be a year of high-single- to low-double-digit returns, due largely to a deluge of easy money and valuations that are still below 10-year historical averages. Equities remain supported by an improving global growth momentum, and we maintain our moderate overweight recommendation on this asset class. US companies continue to show the strongest earnings momentum and we expect US earnings to grow by a solid 6% in 2013. We increased our overweight US equities position, relative to other regions in February this year.
We also remain constructive on the Asia ex-Japan equity market. Accelerating economic growth in key countries, stabilizing profit margins, and decent valuations speak in favor of the region. Signs are also emerging that the Asia ex- Japan economies have stabilized and are gaining momentum following the modest recoveries in China and the US.
Asia ex-Japan equities had a benign start in the first two months of 2013, and valuations are supportive of further upside. MSCI Asia ex-Japan is currently trading at 11.5x 12-month-forward P/E compared to MSCI World’s 14.0x, and has a higher earnings growth rate of 13.8% compared to MSCI World’s 10.9%. We continue to expect a positive performance from Asia ex-Japan equities in 2013.
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