- Fueled by a series of incrementally positive news – gradual re-opening of economies, record-breaking stimulus packages – global equities have rallied strongly after its March meltdown.
- We think its apt to revisit the 3 core metrics that guides us in our thinking – earnings growth, valuations and upside potentials – to evaluate our investment opportunities at the current juncture.
- Earnings growth: Earnings of global equities are likely to be extremely bad this year, but the silver lining is that earnings are likely bottom this year, followed by a robust rebound next year as the global economy pick up after Covid-19. The speed of the post-Covid recovery will vary significantly across the respective equity markets, with the EMs and certain Asian market leading in earnings growth.
- Valuations: While the valuations of many markets are currently trading at elevated levels, this is mainly attributed to the rapid erosion in earnings this year. Markets are a whole lot more reasonable in valuations, if investors were to look beyond 2020 and measure on the basis of next year’s earnings (forward earnings) instead.
- Upside potential: In the near term as we move into 2H 2020, we think markets still have the potential to move higher as driven by the various tailwinds and catalysts (Central Banks support and liquidity injections). While markets can edge higher, risks are also mounting rapidly as we enter the second half – US-China tensions, US elections, Second wave of infection and delays in global economic re-opening.
- From a longer term perspective, 1 to 2 years out, we are positive on the outlook of equities. We reiterate the importance of staying invested and investing progressively to tide through the volatile market conditions – while not letting opportunities to slip away.
Chart 1: Almost all global equities have recovered valiantly from the March’s meltdown in prices
How are earnings growth prospects like for 2H20 and ahead?
Chart 2: Global earnings growth to crater this year, but look ahead at 2021 for robust recovery
Chart 3: Earnings growth of emerging markets and Asian ex Japan equities are expected to be higher than global equities on an annualised basis
Are valuations of global equities expensive now?
Chart 4: Current valuations are elevated, but forward valuations are still quite reasonable.
What kind of the potential upside investors can expect looking ahead?
Chart 5: Massive balance sheet expansion in 2020 had a profound impact on equity prices
Are there any potential pitfalls for investments ahead?
The longer term picture: Stay disciplined and invest progressively
Chart 6: GDP takes a year or two to recover to pre-covid levels according to central banks
Chart 7: Central banks expect inflation to return in the next 1-2 years
Table 1: Indicative upside potential of various equity markets by end-2022 of if you invest today
|
Equity Markets |
2020 YTD Performance (%)* |
Upside Potential |
|
MSCI World |
-8% |
15% |
|
MSCI Developed Markets |
-9% |
11% |
|
MSCI Emerging Markets |
-11% |
26% |
|
Digital Economy |
32% |
27% |
|
US |
-6% |
10% |
|
Europe |
-15% |
11% |
|
Japan |
-6% |
14% |
|
Asia Ex Jap |
-7% |
31% |
|
China A |
-2% |
31% |
|
China H |
-9% |
63% |
|
India |
-18% |
35% |
|
Russia |
-20% |
20% |
|
Brazil |
-20% |
28% |
|
Singapore |
-17% |
33% |
|
Hong Kong |
-14% |
35% |
|
Source: Bloomberg Finance L.P., iFAST estimates. Data as Jun 2020. *Year-to-date performance and upside potential are calculated in local currency terms, for the respective markets. |
||
Table 2: Investment views on global equities markets for 2H 2020.
|
Equity Markets |
Market Views |
|
|
MSCI Developed Markets |
Neutral |
· Heavy fiscal stimulus and massive liquidity injection are positives for equities. · Valuation slightly pricey; Economy hit hard for DMs (US, Europe and Japan) from Covid outbreak. |
|
MSCI Emerging Markets |
Attractive |
· Mixed macro outlook with Asian EMs better than LATAM and EMEA peers. · Weak USD trend benefits EM and EM currency; Improving commodity prices as tailwind. |
|
Digital Economy |
Attractive |
· Covid outbreak accelerated trends positive to digital economy (i.e. WFH, online retail etc.); Attractive long term growth potential. · Earnings strength and resiliency outstrips sectoral peers despite the recessionary backdrop |
|
US |
Not Attractive |
· Recent rally running hot amid optimism and momentum. · Risk mounting in 2H 2020; i) US-China tension, ii) US election, iii) second wave of infection, iii) surging insolvencies and iv) fiscal policy cliff. |
|
Europe |
Neutral |
· Economic slowdown bottomed but will take time to recover; Massive stimulus should support recovery. · Possible shift towards fiscal union a positive for macro, equities and currency outlook. |
|
Japan |
Attractive |
· Heavy support by BOJ (i.e. ETF buying) puts a floor on equity prices; Massive fiscal stimulus targeted at corporates. · 2021 Olympic will be a one-off boost; Protracted economic recovery limits upside. |
|
Asia Ex Jap |
Very Attractive |
· Heads-up in recovery after containment of Covid; Macro and earnings less impacted VS regional peers. · Valuation remains reasonable and cheap from forward perspective. |
|
China A |
Very Attractive |
· Heavy support by PBOC will aid in faster economic recovery. · Milder impact on earnings; Earnings rebound also lifted by PBOC support due to concentrated domestic exposure |
|
China H |
Very Attractive |
· Heavy support by PBOC will aid in faster economic recovery. · Milder impact on earnings; Cheap valuation enhances upside potential from re-rating. |
|
India |
Neutral |
· 10-week lockdown has left economy in tatters, with unemployment skyrocketing to 23.5%. · High earnings growth potential but faces risks of revision. |
|
Russia |
Attractive |
· Oil price is the main risk but should see more upside in FY21 and FY22, backed by recovery in global demand. · Cheap valuation and very high dividend yield. |
|
Brazil |
Neutral |
· Deteriorating macro outlook with one of the world’s worse Covid situation; Rising political unrest. · Benefits from global risk-on but very exposed to potential bouts of risk-offs. |
|
Singapore |
Very Attractive |
· Benefits greatly from a China-led recovery; Economy should reopen soon. · Relatively high dividend yield and low valuation level. |
|
Hong Kong |
Very Attractive |
· China-led recovery presents huge upside for equities. · Cheap valuation limits downside risk despite recent social turmoil. |
|
Source: iFAST compilations. |
||
The Research Team is part of iFAST Financial Pte Ltd.
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