What’s Next for Global Equities?
In the second of a series of videos providing updated views on financial markets, Ashwin Alankar, Head of Global Asset Allocation, discusses how the outlook for global stocks has changed and why inflation could still be a risk in the U.S.
- We believe few catalysts remain for global equities now that the most significant fears weighing on stocks at the end of 2018, including monetary tightening and U.S.-China trade tensions, have eased.
- As a result, we think investors must consider stock multiples, with our quantitative signals pointing to European equities as being the most attractively valued today.
- In addition, we worry that with real rates (or inflation-adjusted rates) at the long end of the yield curve remaining well below the potential for real GDP in the U.S., inflation risks remain.
Ashwin Alankar: What has transpired, really, through the course of 2019 year to date is all the forces that we were afraid that may push economies into recession have disappeared. China-U.S. trade negotiations are going better than expected. Earnings came in great, and the central bank took a 180-degree turn from being very hawkish to now I would say quite dovish. So the important question to ask now are what other catalysts do we have that could continue equity markets to march forward and march higher. In our opinion, we believe all the catalysts have fired. So what now? Where are the opportunities now? We see much better opportunities outside of the U.S.
Europe, according to our suite of quantitative signals, is showcasing the most attractiveness of any equity region globally. And the most attractive equity sector globally, according to our signals, European banks. And that is quite contrarian, right? European banks, I honestly can’t think of one particularly stellar thing about the environment today that would promote the profitability of European banks, but maybe it is because everything is so bad, how much worse can it get? While the U.S. has led the market over the past 10 years, you could see a turn in leadership, and we believe that turn in leadership may actually be Europe.
We think the underpinnings are quite strong in China. Emerging markets are one of the few areas around the world where they can engage in fiscal stimulus. And China has shown its commitment to fiscal stimulus. They cut taxes, they are investing more in capital investments, infrastructure. They have lowered required capital ratios for banks, so banks can lend more. So China we are actually quite optimistic about. We worry with the amount of money in circulation, we worry about rates at the back end being quite low with real rates sitting well below real GDP potential in the U.S., that you are creating once again a set of ingredients that can fuel inflation.
Remember, what the Fed wanted to do was the Fed wanted to renormalize monetary conditions, because rates, real rates were just so low. They were 100% successful, in my opinion, in normalizing front-end rates. So your front-end rates right now are sitting very close to inflation. But your back-end rates, the real rates are still abnormally low. So they finish one chapter of the normalization, they did not finish the next chapter. And Powell, unfortunately, has put that second chapter on hold. And if you want to mitigate that fear of unexpected inflation happening, you need to finish the normalization and that requires those back-end rates to rise, which is accomplished by balance sheet reduction.
The opinions and views expressed are as of 3/19/19 and are subject to change without notice. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. No forecasts can be guaranteed. Opinions and examples are meant as an illustration of broader themes and are not an indication of trading intent. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. Janus Henderson Group plc through its subsidiaries may manage investment products with a financial interest in securities mentioned herein and any comments should not be construed as a reflection on the past or future profitability. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use. Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value.
Our Adaptive Multi-Asset Solutions Team arrives at its outlook using options market prices to infer expected tail gains (ETG) and expected tail losses (ETL) for each asset class. The ratio of these two (ETG/ETL) provides signals about the risk-adjusted attractiveness of each asset class.
Janus Henderson and Knowledge. Shared are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.