GLOBAL EQUITY MARKETS RISE 1% IN MAY, JAPAN STAR PERFORMER
Source: JP Morgan Asset Management
World stock markets shrugged off weak first-quarter US economic data, volatility in global bond yields and investor uncertainty over the outlook for growth, to post further gains in May. In local currency terms, the MSCI World Index finished the month up 1.3%. Among major markets, the star performer was Japan, up 5.1%, boosted by strong economic and corporate earnings growth in the first quarter. Meanwhile, US equities performed in line with the MSCI World Index, boosted by better-than-anticipated first-quarter earnings results. In Europe, performance was mixed. Italy again outperformed (up 3.2%), while the UK (up 0.6%) and France (up 0.2%) were modestly positive. Conversely, Spain (down 1.2%) and Germany (down 0.7%) lagged. For emerging markets, it was a negative month after a strong start to the year. The MSCI Emerging Markets Index fell 2.5%. The weakest markets were South Africa, the United Arab Emirates, Brazil, Russia and Qatar, which all fell by over 4%. India and Indonesia were notable exceptions, rising by 3.4% and 4.8% respectively.
GOING FOR GROWTH
The key dilemma for asset allocators currently is conflicting market signals on the growth outlook. Disappointing economic data for the first quarter in both the US and the major emerging markets have led to downward revisions to global GDP forecasts for this year. The consensus now seems to be for GDP growth of around 2.0%-2.5% in the US and around 6.5% in China. Conversely, recent growth trends in both the eurozone and Japan have been encouraging, with JPMorgan Securities revising up its GDP forecast for the eurozone to 1.6% growth. Overall, however, global growth for 2015 seems unlikely to accelerate much from last year’s slow-gear growth of around 2.7%. We see this as a typical mid-cycle pause in a long (seven- to nine-year) expansion cycle, rather than as a cause for undue concern. The recent spike in bond yields is for us a painful part of normalisation, as investors react to both the prospect of higher interest rates and a stronger growth outlook in 2016 and beyond. It is notable that in May’s BoA Merrill Lynch Fund Manager Survey, 70% of respondents expect the global real economy to be stronger over the next 12 months, while JPMorgan Securities expect global GDP growth to accelerate to 3.3% next year. However, high cash levels (of around 4.5%) imply high levels of investor uncertainty in the near term. Overall, we remain cautiously optimistic on the global growth outlook and therefore retain our tilt towards cyclical expansion and our overweight in equities and underweight in cash and government bonds.
UNDERLYING US EARNINGS-PER-SHARE (EPS) - GROWTH TO REMAIN HEALTHY IN 2015
Despite recent economic data, our constructive outlook for US equities remains intact, given that underlying earnings growth remains healthy. Investors entered the first-quarter reporting season quite skittish as earnings estimates were drastically reduced due to plummeting oil prices and the rapid appreciation of the US dollar. However, with 492 of the S&P 500 companies reporting, 68% have beaten earnings expectations. The healthcare and utilities sectors have seen the strongest year-on-year (y/y) earnings growth at 18.6%