Last quarter, we shared our view that the change in the US administration could lead to pro-growth policies with significant implications for equity investors (1Q2017 Global Equity Outlook: From Low Growth to Pro-Growth). Since then, optimism on the economy has indeed soared, but we believe it needs to be converted into confidence to ignite corporate “animal spirits.” In this quarterly outlook, we explore transmission mechanisms, potential headwinds, and mileposts that may indicate this transition is underway.
- We maintain a positive outlook for equities based on earnings growth. Global growth and earnings forecasts are trending upward in all major regions for the first time since 2010. US equities have reached all-time highs and valuations are expensive in many regions globally, reflecting investor and business optimism about the potential for pro-growth policies that could support further economic and earnings growth.
- Optimism now needs to convert to confidence in order to turn sentiment into action, generating real business activity and maintaining investor enthusiasm. We think deregulation and tax reform are critical components of this transition. Regulatory reform is easier to enact because it can largely be accomplished with executive orders. Tax reform may be more challenging, but we think it is the key to reviving confidence.
- Political uncertainty remains a risk to this transition process. In the US, we think the failure to pass healthcare reform (to date) has increased the risks around the administration’s ability to execute on other elements of its pro-growth agenda. European political risk remains elevated, but may actually be receding, given the results of recent elections in the Netherlands and France. Polls in France indicate that Emmanuel Macron is likely to defeat the nationalist candidate Marine Le Pen in the second round election on May 7.
- Signs we will be watching to gauge whether the conversion to confidence is successful include rising corporate investment and earnings growth meeting or exceeding forecasts. We believe it is important to see fundamentals catch up to expectations, particularly given today’s full equity valuations.
- We maintain most of our regional and sector views from last quarter, based on our core expectation of stronger global growth. We are still positive on the US but recognize that legislative challenges could slow the pace of pro-growth policy implementation. We are more bullish on Europe than last quarter due to earnings upgrades and potentially receding political risk. We continue to believe economic momentum will support EM equities, and remain optimistic on corporate fundamentals in Japan.