The bullish mood continues as Citi predicts that not only will equities gain 15% worldwide, they even think there is room for further growth from re-ratings by year-end 2014. “Despite this ‘Great Rerating’ of 40% over the last two years, global stocks look reasonably priced on 40-50 year average P/Es,” writes Citi analyst Robert Buckland. “We think that 2014 equity gains will be driven partly by a resumption of global EPS growth and partly by a further flow-enhanced re-rating.”
EPS has been flat for equities
Buckland acknowledges that EPS has been flat, and that it will need to start growing to support stock prices, but he expects that to happen in the next 12 to 18 months. He also cites reasonable stock valuations, GDP growth, slowing earnings downgrades and a growing appetite for risk as reasons for optimism. Certainly, not everyone agrees that stock valuations are reasonable right now, and the growing appetite for risk could also fall off if investors get nervous about the impact of tapering. If equity inflows start to fall it could be harder to support high stock prices, causing some people to look at other asset classes.
At the 2021 SALT New York conference, which was held earlier this week, one of the panels on the main stage discussed the best macro shifts coming out of the pandemic and investing in value amid distress. The panel featured: Todd Lemkin, the chief investment officer of Canyon Partners; Peter Wallach, the managing director and Read More
He also argues that dividend growth has partially offset the lack of EPS growth over the last year, and that there is room for even more dividend growth in 2014.
Emerging Markets and Europe preferred
“In our regional allocation we prefer Emerging Markets and Europe over the US and Australia,” writes Buckland. He also prefers Asia to Latin America, especially China, Korea, and Taiwan. Buckland also forecasts better returns for European equities than the US. It’s interesting that many investors pulled money out of EM in the run-up to what everyone expected to be the beginning of tapering this fall, and now that there is again a lot of speculation that it could finally start this or next month, Citi is most bullish on EM.
But Buckland does say that he favors EM countries with current account surpluses, and is underweight on dual deficit countries including Brazil, India, and South Africa. These countries have benefited from loose Fed policy, and their economies could slow when QE finally comes to an end and it’s not as easy to refinance debt on the cheap.