Didier Duret - RTL.nl

6
Equity market outlook
Recognising progress
The current political muddling through on the eurozone and
US debt crisis entails a new economic reality of slower global
growth that is dampening global equity market sentiment.
This reality can also be viewed as a new “wall of worry” for
equity investors. However, this state of the world economy is
not necessarily negative for equities. At least, there is
movement and no political nor economic paralysis. And we
believe that the movement is in the right direction, with active
support from the central banks to reduce systemic risk and to
move towards more sustainable and more balanced global
economic growth with a new competitive order for firms in
the global marketplace.
Gaining exposure in the ebb and flow
September’s politically momentous decisions by the ECB and
EU leaders will lead either to an acceleration of work in
progress or to a temporary setback. A positive outcome
would give further support to the equity rally in Europe and,
in particular, to emerging countries. It could also potentially
fuel a renewed focus on more cyclical (as well as financial)
stocks. A negative outcome would hamper equities, but not
necessarily be a disaster in term of earnings trends. As long
as steps go in the direction of the sustainability of public debt,
there is progress, and any setbacks in Q4 could then be entry
opportunities. Despite the recent rally, valuations are in
historically attractive territory, for both developed and
emerging markets.
Re-entering Europe
The geographical preference is tilted towards Europe (now
overweight) at the expense of the US market (underweight)
considering the valuation gap (see graph) and potential catchup
due to lower systemic risk. The US has served as a safe
haven for almost two years and is therefore trading at above
Asset class Fundamental view Recommendations
Equities
Overweight
Abating systemic risk unveils the value of equities when
bonds yield little
Strong earnings on broad indices mask a huge
divergence. The short-term downside risks present
opportunities
Earnings sustainability is a safe haven
in equity markets
Research & Strategy
Sybren Brouwer – Global Head Equity Research
average historic multiples (see graph). In the next few
months, tables could gradually turn in Europe’s favour both
from valuation and earnings momentum perspectives.
Emerging markets (overweight) should regain ground,
as they are also modestly valued. Even though short-term
earnings are suffering in the global economic slowdown,
we believe that mid- to longer-term earnings growth potential
is attractive.
We keep an emphasis on high-quality companies that
generate sustainable growth and solid cash flows. These
stocks have become more expensive on a preference for
low-risk stocks. But, in a low interest-rate environment, solid
cash flows become more valuable, so these stocks might
keep an upside potential.
Valuation gap (trailing price/earnings ) between the US and Europe
30
24
18
11
5
Aug 05 May 06 Feb 07 Nov 07 Aug 08 May 09 Feb 10 Nov 10 Aug 11 May 12
Source: Bloomberg
MSCI USA - price/earnings
MSCI Europe - price/earnings
Sustainable earnings growth stocks to stay expensive:
they are driven by long term competitiveness trends,
independent of economic growth
Investors are prepared to pay a premium for solid cash
flows in a low-interest rate environment
This can be found in Industrials and Healthcare sectors,
in emerging markets exposure and through a thematic
approach