At its recent mid-2017 outlook briefing, Citi still sounded cautiously optimistic about the remainder of the year, seeing the global recovery remaining on track despite rising Chinese economy concerns. As of May, global equities have rallied 10.5 percent, with emerging market equities up 17 percent on a year-to-date basis. Bond markets have also posted positive returns of about 4 percent, surprising a lot of investors.
So does the global market still have legs to run another stretch? Their analysts think so. They believe that emerging market stocks, as well as European equities, still offer opportunities given attractive valuations and improving fundamentals. One of the favorite charts that analysts frequently refer to is the heat map of the global purchasing managers index (PMI), which shows the economic health of the manufacturing sector.
Except for some countries, such as Greece, the PMI for most of the world seems to be on an expansionary mode. They expect moderate and broad-based global growth as the structural problems that littered the economic landscape have start to recede. These problems include the fiscal tightening of most of the developed nations, the European debt crisis, the global bank deleveraging, the decline in emerging market growth and the collapse in commodity prices. They now see a clearer horizon with rising corporate profits, a pick-up in investment spending, higher industrial activity and low interest rates across the globe. Of course, there are still risks and concerns about a slowdown in Chinese economic activity, geopolitical risks practically in all areas of the world and rising scepticism over US tax reforms.
Given the sustained recovery in the US economy, the Fed is expected to pick up speed with three possible rate hikes anticipated this year. The Fed appears to be an exception, though, in terms of monetary tightening, as other central banks, including the Bangko Sentral ng Pilipinas (BSP), are expected to put any policy tightening on hold for a while longer.
As long as rates do not rise rapidly, corporate bonds and equities are expected to hold up. Their analysts expect all major regional equity markets to deliver positive earnings growth in 2017. They expect global earnings to rise 15 percent this year with 11 percent in the US, 22 percent in the UK and 19 percent in Europe. Japan and the other markets are also forecast to post double-digit earnings growth. This synchronized growth has only occurred seven times since 1990, which is phenomenal considering that a lot of these economies have just experienced a recession in the recent past.
The question on everyone’s mind, with all these developments, is: if this market still has legs, where are the opportunities? Their analysts expect emerging markets, particularly Asia, to outperform other regional equity markets. They also believe that emerging Europe and Latin American equity valuations remain at historical levels of large discounts to the US. They are also positive on the cyclical sectors, such as energy, financials and technology.
So does this all make sense? It certainly appears to be the case. Will our country be able to catch up with the rest of the world in this unusual synchronized growth? We certainly hope so.
Ronald Goseco is currently executive vice president of FINEX and president of IDI-VW.