Edmond de Rothschild Asset Management advises capitalisation on disparities in international equity markets.
US growth, the oil counter shock and prevalent investor scepticism are three very good reasons for equity markets to advance in 2015, especially as international equity markets have not yet fully discounted elements like non-materialisation of the expected rate hike in 2014 and a collapse in commodity prices.
Last year’s double-digit advance in international equity markets (almost +20% in EUR with the currency effect accounting for half of that) and the rally in early 2015 have, however, masked numerous disparities which need to be closely watched.
Focusing on a value strategy helps capitalise on these disparities.
The global economic recovery is driving international equity markets
The US economy really stood out from the pack in 2014. The S&P500 gained 28 % in EUR3 on strong economic growth and upbeat company earnings. Ongoing moves to increase wages in the US should underpin growth there in 2015.
Household spending has picked up and the fall in average indebtedness could justify expectations of a property recovery. Cash flow has never been as abundant and funding rarely as accessible; as a result, US company earnings now represent more than 10 % of GDP, an absolute record.
They now have large cash piles which could be rechannelled into investments and acquisitions/restructuring or returned to shareholders.
Europe in 2015 will be driven by the knock-on effect from the US recovery, especially in the second half of the year, and by the European Central Bank’s quantitative easing programme. The QE launch has coincided with tangible signs of a recovery both in European surveys and economic statistics.
Moreover, this has occurred after several months of downgrades which left expectations very low. One of this year’s pleasant surprises might be an increase in European company sales as spending recovers. European earnings have considerable rebound potential amid an economic recovery.
Corporate margins are somewhat compressed and have genuine potential to expand. Interest rates are in free fall, providing companies with very favourable funding conditions while retreating commodity prices are helping margins to rise.
Company competitiveness is also improving due to the euro’s fall against the US dollar.
And the oil price collapse is excellent news for industrialised countries. The IMF reckons a 30 % drop in the oil price adds around 0.8 % to GDP growth in developed countries.
But political risk like Greece’s ambivalent attitude to its creditors, the increasing popularity of anti-European parties in Spain, France and the UK, tension in Ukraine and Middle Eastern conflicts has resurfaced in recent months, somewhat reducing the impact of this upbeat macroeconomic news.
As for emerging markets, the picture is very varied.
Caution is necessary as some are sensitive to commodity prices. There has also been a slowing in earnings revisions, notably in Asia, and they will be hit by US monetary tightening.
The first move to raise rates might occur in June judging from Fed chair Janet Yellen’s comments after the FOMC on 18 March.
Capitalise on international equity market disparities thanks to a global approach to discounted stocks
International equities have been riding on the global recovery but have shown very wide disparities. There are, for example, big valuation gaps between cyclicals and non-cyclicals.
Investor risk aversion has led to non-cyclicals largely outperforming cyclicals. Non-cyclicals are now very expensive and trading close to historic highs on developed markets.
Cyclicals have been snubbed despite the favourable macroeconomic environment and are now heavily discounted. As a result, they have strong upside.
But stock picking is essential to ward against risk and seize opportunities on today’s markets. The current environment is above all conducive to Value investing which seeks to exploit wide disparities. To achieve diversification, the sort of thematic approach adopted by our value strategy helps us dispense with sector and geographical bias.
And to multiply investment opportunities while diversifying risk, it is important to navigate a global investment universe rather than be limited by a more traditional approach based on geographical analysis.
“We strive to detect investment themes in a global universe and forge convictions on a stock-by-stock basis so as to build a portfolio that reflects our strongest convictions,” says Christophe Foliot, head of International Equities at Edmond de Rothschild Asset Management (France).
“With today’s soft but sustainable pattern of growth, we are particularly interested in investment themes like property market normalisation, the global automotive cycle, the recovery in middle class consumption and increased spending on healthcare.”