An analysis of global equities published last week by Barclays analysts Ian Scott, Dennis Jose, CFA, and Joao Toniato, Ph.D. says there is room for a further rise in 2014, and that there is “little evidence of QE-inspired excesses.”
Global stocks under-pinned by fundamentals
The Barclays analysts project global real GDP growth of 3.4% and global industrial production growth of 4.9% in 2014. The report says this acceleration in growth will seek to close a large output gap still in place due to slowing global output over the past three years.
This economic growth is likely to boost forward earnings by 11% in a situation where current valuations are at best lined up with long-term averages, making a strong case for global equities to appreciate further next year.
“Key measures of value currently sit close to their long-run averages, suggesting an agnostic set of expectations regarding the outlook for earnings and discount rates,” say Barclays’ strategists Ian Scott, Dennis Jose and Joao Toniato in their analysis. “…It is difficult to find evidence of exuberance in current equity prices. So, while it is tempting to view super loose monetary policy as a key driver of the market’s recovery, we disagree and suggest stocks are supported at current levels by fundamentals,” they continue.
European and Emerging Markets lead in return expectations
Europe (Ex-UK) could generate total returns of up to 24% in 2014 while Emerging Markets are not far behind at 22%, as per the region-wise global returns table shown below:
Why Barclays is overweight on Europe
Low valuations resulting from “misplaced risk aversion,” and bullish EPS growth projections make European equities attractive, according to Barclays. U.S. investors, in particular, have already moved to take advantage of this, buying ~$81B worth of European stocks this year through August. This was the heaviest buying since 1992/93.
“We suspect that this transatlantic move towards European stocks is still in its infancy. In addition to the valuation discount, we expect European earnings growth to improve in 2014,” say the Barclays strategists. “After several difficult years, we suspect that a turn up in EPS growth will be seen as a very positive development and usher in expectations of further improvements to come.”
Emerging Markets: Period of outperformance ahead
Four factors create an investment case for equities in emerging markets.
- Higher risk premia compared to developed markets
- Downwards earnings revisions may now be over
- Forward EPS growth to pick up
- Price to Book Multiples now at 2008 trough levels (see chart below)
Sentiment: The fly in the ointment
The Barclays strategists sound a note of caution, however. Market sentiment has been running high, and the U.S. Investors’ Intelligence Survey shows there are 40% more bulls than bears, versus 13.4% at end-August. Of more predictive value, however, is the ‘bears’ reading, with only 16% saying they were bears. “Since the beginning of 2009, when there have been less than 18% bears, the market has been lower six months later on each occasion,” points out the Barclays team.