By Benjamin Segal, Portfolio Manager and Head of Global Equity Team
Despite the investor optimism around the new administration in the White House - including the potential for reduced regulation and lower corporate taxes - international equity markets, both developed and emerging, outperformed the U.S. in the first quarter of 2017. As fears of a more protectionist U.S. have abated, political risks in Europe and elsewhere appear to be declining. The defeat of populist candidate Geert Wilders in the recent Dutch election and the strength of pro-EU candidate Emmanuel Macron in the French election polls have lent credence to the view that political visibility is improving after the 2016 surprises of the “Brexit” vote in the U.K. and Donald Trump’s election in the U.S. European stocks, and the euro currency should benefit as prospects of populist/nationalist candidates diminish. At the same time, the economic outlook is improving in Europe, just as the pro-business agenda in the U.S. appears to be stalling.
Eurozone PMIs recently hit a six-year high, and business and consumer sentiment are much improved. Most banks in Europe have built a significant capital cushion, and with the European Central Bank now expecting economic growth of 1.8% this year and next, the outlook for profits in the financial sector looks more promising than it has for some time, which should lead to higher rates. Moreover, while profit margins in the U.S. have been pressured for the past two years by increasing wages, Europe’s lower level of overall employment means that labor cost inflation should remain muted. With their currencies, specifically the euro and the pound sterling, at or below 10-year lows, European multinationals find themselves in an increasingly competitive position relative to their global peers.
Meanwhile, Asian companies will continue to benefit from growth in China, where household consumption continues to grow at high single digits, and innovation in the technology sector continues apace. Ongoing improvement in corporate governance - where Asia has historically lagged the West - should provide further support to valuations in Japan and other regional markets. In the emerging economies, markets are off their 2016 lows, while valuations are undemanding relative to history and to their expected growth rates.
While the U.S. economy remains solid and corporate balance sheets are strong, the post-election run-up in stock prices offers reason for near-term caution. With valuation upside hard to find in the U.S. market, we believe that the combination of positive political trends, recovering economies and low expectations makes international equity markets relatively compelling.
In Case You Missed It
- ISM Manufacturing: -0.5 to 57.2 in March
- Eurozone Producer Price Index: Flat in February month-over-month and +4.5% year-over-year
- ISM Non-Manufacturing: -2.4 to 55.2 in March
- U.S. Employment Report: Nonfarm payrolls increased 98,000 and the unemployment rate decreased to 4.5% in March
What to Watch For
- Thursday 4/13:
- U.S. Producer Price Index
- Friday 4/14:
- U.S. Retail Sales
- U.S. Consumer Price Index
– Andrew White, Investment Strategy Group
Statistics on the Current State of the Market – as of April 7, 2017
|S&P 500 Index||-0.2%||-0.2%||5.8%|
|Russell 1000 Index||-0.3%||-0.3%||5.7%|
|Russell 1000 Growth Index||-0.3%||-0.3%||8.6%|
|Russell 1000 Value Index||-0.2%||-0.2%||3.0%|
|Russell 2000 Index||-1.5%||-1.5%||0.9%|
|MSCI World Index||-0.4%||-0.4%||6.1%|
|MSCI EAFE Index||-0.6%||-0.6%||6.7%|
|MSCI Emerging Markets Index||0.4%||0.4%||11.9%|
|STOXX Europe 600||-0.6%||-0.6%||7.0%|
|FTSE 100 Index||0.5%||0.5%||4.2%|
|CSI 300 Index||1.8%||1.8%||6.3%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.0%||0.0%||0.2%|
|Citigroup 10-Year Treasury Index||0.2%||0.2%||1.0%|
|Bloomberg Barclays Municipal Bond Index||0.4%||0.4%||2.0%|
|Bloomberg Barclays US Aggregate Bond Index||0.2%||0.2%||1.0%|
|Bloomberg Barclays Global Aggregate Index||0.1%||0.1%||1.8%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.2%||0.2%||0.9%|
|BofA Merrill Lynch U.S. High Yield Index||0.3%||0.3%||3.0%|
|BofA Merrill Lynch Global High Yield Index||0.2%||0.2%||3.2%|
|JP Morgan EMBI Global Diversified Index||0.5%||0.5%||4.3%|
|JP Morgan GBI-EM Global Diversified Index||-0.3%||-0.3%||6.2%|
|U.S. Dollar per British Pounds||-0.9%||-0.9%||0.3%|
|U.S. Dollar per Euro||-0.7%||-0.7%||0.7%|
|U.S. Dollar per Japanese Yen||0.6%||0.6%||5.3%|
|Real & Alternative Assets|
|Alerian MLP Index||0.8%||0.8%||4.7%|
|FTSE EPRA/NAREIT North America Index||1.0%||1.0%||1.4%|
|FTSE EPRA/NAREIT Global Index||1.2%||1.2%||4.6%|
|Bloomberg Commodity Index||0.6%||0.6%||-1.8%|
|Gold (NYM $/ozt) Continuous Future||0.5%||0.5%||9.2%|
|Crude Oil (NYM $/bbl) Continuous Future||3.2%||3.2%||-2.8%|
Source: FactSet, Neuberger Berman.
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