2017 Equity outlook
Oil, policy, economy and currencies
Patrick Moonen
Principal strategist Multi Asset
November 15, 2016
www.nnip.com1
2016: a year with two faces but full of surprises
•
Difficult start of the year driven by weaker macro data, EM worries and a sharp drop in the oil price
•
The Fed switched to a much more dovish stance than anticipated end 2015
•
USD strength turned into weakness (bad for Japan, Eurozone)
•
Bond yields declined (pressuring financials)
•
The search for yield strengthened
•
ECB and BoJ ventured further into unchartered territory but with mixed success
•
Brexit, after the initial shock represented a turnaround
•
Hopes on a more balanced policy mix
•
Turn in macro surprises, global cycle indicator
•
Higher bond yields
•
US earnings troughed in Q2
•
A shift from search for yield into reflation trades accelerating after Trump victory
•
US elections: Another big surprise, adding to political uncertainty, big impact on emerging markets
and reflation trades (financials and cyclicals)
2
Equity market performance (in local currency)
Surprise surprise, the UK is the best performing market
UK
EM
USA
Eurozone
Japan
Currencies, commodities and political risks
3
But 2017 might become more difficult for the UK
UK : For how long in the equity sweet spot?
4
Sector performance
Over summer, the thematics changed
Yield and safety
Cyclicality
5
From yield towards growth assets
Macro worries
Brexit
Reflation trade starts
6
Equity drivers for 2017
Reflation trade to continue? Factors to watch
•
A pick up in global nominal growth (G4 from 2.1e% this year to 3.3e% in 2017)
•
A more balanced economic policy approach. Less monetary, more fiscal policy
•
Modest (single-digit) acceleration in earnings growth
•
The importance of the oil price for earnings, capex, yields and hence sector rotation
•
High equity risk premium to act as a (modest) buffer against higher bond yields
•
The world’s political minefield will cause the occasional bounce in volatility, especially in Europe and will keep the
equity risk premium high
•
Trump impact: Short term higher uncertainty due to lack of visibility on actual policy. EM most vulnerable. US cyclical
sectors and Financials look a safer place. Europe somewhere in-between.
•
On balance we prefer Non-US to US equity markets but Trump policies key going forward. The cyclical rotation may
continue depending on yields, policy and macro drivers
•
Preferred sector(s): Financials, Materials
•
Preferred region(s): Japan
7
The Equity allocation
Region and sector allocation
Equity Sector Allocation
Equity region allocation
EM
Dev. Asia
Japan
UK
Eurozone
US
-4
-2
0
2
4
Energy
Health Care
Technology
Materials
Staples
Telecom
Consumer Disc.
Financials
Utilities
Industrials
-4
-2
0
2
4
Allocation preference
Allocation preference
In sectors we play the reflation theme. Regional convictions more modest due to Trump
policy uncertainty potentially impacting regions very differently (EM neg., US pos.?)
8
Lacklustre post-GFC earnings growth
Low earnings affect corporate confidence and capex
•
•
•
•
Very low earnings growth since 2012
Impact of low commodity prices
Low nominal GDP growth
Eurozone earnings growth was much weaker
than US earnings growth
• Sector impact (commodities versus technology)
• Sector profitability (12/2015 data)
Financials
Staples
Discretionary
Telecom
Utilities
Basic Materials
Industrials
Health Care
Technology
Energy
Return on equity
US
Eurozone
10,01
5,99
17,05
13,45
17,81
11,41
16,58
7,64
6,58
2,62
8,86
5,42
16,12
10,54
14,56
8,78
17,92
12,29
-5,55
-3,22
Net operating margin
US
Eurozone
8,3%
12,0%
17,3%
17,0%
8,6%
11,6%
13,2%
19,0%
-6,4%
8,3%
8,6%
10,1%
4,2%
5,7%
6,5%
13,9%
10,0%
1,0%
9
The importance of the oil price for earnings
Oil earnings contribution turned negative in 2016
Oil above USD 40 will push earnings growth higher thanks to bigger energy contribution
10
The importance of oil for global capex
Outside energy, capex growth was positive
11
Margin developments
Eurozone margins have hardly recovered
There is scope for structural and cyclical recovery in Eurozone and Japanese margins
12
Some earnings improvement expected in 2017
But the consensus looks overly optimistic
NNIP Top Down estimates
Actual earnings growth will depend on oil price, bond yields and currencies
13
Corporate balance sheets: Diverging trends
Japanese corporates have ample room to add debt
US non-financial corporates are gradually adding debt. Might become a LT challenge
14
Valuation metrics
Half full or half empty? A matter of perspective
High equity risk premium to act as a (modest) buffer against higher bond yields
15
Regional valuations
Will the high US valuation premium persist? We think it is at risk
Increasing premium driven by risk profile, currencies, buy backs and profitability. But what
will happen to valuations when monetary policy tightens and political uncertainty increases?
16
Earnings visibility comes at a price
Relative valuation of staples versus discretionary at 20yr high
17
A different style
Eurozone Value catching up fast with the US
There is clearly more room for value outperformance.
5-10% valuation discount relative to the 10-yr average
18
Bond yields and cyclical performance
Relative performance cyclicals ex financials ex energy
19
The influence of bond yields on sectors
Divergent sector impact of rising bond yields
20
Data surprises and cyclical performance
Expectation for
more fiscal policy
21
The reflation trade has also regional consequences
Japan and Eurozone should benefit more from the cyclical recovery trade
US policy exp
Financials
Materials
Energy
Industrials
Cons. Discret
Total
Reflation sectors
Japan
12,5%
6,8%
0,9%
21,6%
20,0%
61,7%
EMU
18,6%
8,4%
5,5%
15,9%
14,0%
62,4%
US
13,2%
2,9%
7,3%
9,6%
12,5%
45,4%
Source: Bloomberg, NNIP
22
The influence of currencies on regions
The divergent influence of a stronger USD on Japan and EM
23
Why we prefer Japan to the Eurozone
Structural and cyclical improvements at a reasonable price
24
EM versus DM: US politics increases uncertainty
Earnings, commodity prices and valuations versus US policy
Impact Trump
25
Equities as a source of investment revenue
Rising pay out ratios could limit dividend growth
Name
WORLD-DS Financials - DIVIDEND YIELD
WORLD-DS CONSUMER STAPLES - DIVIDEND YIELD
WORLD-DS Consumer Gds - DIVIDEND YIELD
WORLD-DS Telecom - DIVIDEND YIELD
WORLD-DS Utilities - DIVIDEND YIELD
WORLD-DS Basic Mats - DIVIDEND YIELD
WORLD-DS Industrials - DIVIDEND YIELD
WORLD-DS Health Care - DIVIDEND YIELD
WORLD-DS Technology - DIVIDEND YIELD
WORLD-DS Oil & Gas - DIVIDEND YIELD
WORLD-DS Market - DIVIDEND YIELD
DY
3,23
2,34
2,29
3,8
3,81
2,55
2,16
1,91
1,63
3,45
2,56
LT Growth
7,0%
8,7%
6,1%
3,6%
3,7%
4,7%
6,6%
8,5%
7,3%
5,0%
5,9%
Pay Out
42,0%
56,6%
43,1%
64,5%
63,9%
54,6%
42,1%
45,9%
34,9%
107,2%
46,8%
Avg Pay out
38,7%
45,0%
36,6%
59,4%
61,4%
42,5%
37,6%
42,4%
28,4%
50,5%
41,8%
26
M&A activity
M&A remains at very high levels
Number of global M&A deals (12month average)
45.000
40.000
35.000
30.000
25.000
Dec-04
Aug-05
Apr-06
Dec-06
Aug-07
Apr-08
Dec-08
Aug-09
Apr-10
Dec-10
Aug-11
Apr-12
Dec-12
Aug-13
Apr-14
Dec-14
Aug-15
Apr-16
20.000
27
Conclusions
• We expect modest but accelerating earnings growth depending on
•
•
•
Oil price
Bond yield developments
Currency shifts
Gradual moves, no shocks
• The reflation trade that started in Q3 2016 has further to run
•
•
•
•
Macro and yield developments
Commodity prices
Valuation
Policy shift towards fiscal policy
• Policy and political uncertainty to keep risk premiums high
• Our preferred sectors: Financial and Materials
• Our preferred region: Japan
28
Disclaimer
The elements contained in this document have been prepared solely for the purpose of information and do not constitute an offer, in particular a prospectus or any
invitation to treat, buy or sell any security or to participate in any trading strategy. This document is intended for press use only. While particular attention has been
paid to the contents of this document, no guarantee, warranty or representation, express or implied, is given to the accuracy, correctness or completeness thereof. Any
information given in this document may be subject to change or update without notice. Neither NN Investment Partners B.V., NN Investment Partners Holdings N.V.
nor any other company or unit belonging to the NN Group, nor any of its officers, directors or employees can be held directly or indirectly liable or responsible with
respect to the information and/or recommendations of any kind expressed herein. The information contained in this document cannot be understood as provision of
investment services. If you wish to obtain investment services please contact our office for advice. Use of the information contained in this document is solely at your
risk. Investment sustains risk. Please note that the value of your investment may rise or fall and also that past performance is not indicative of future results and shall in
no event be deemed as such. This document is not intended and may not be used to solicit sales of investments or subscription of securities in countries where this is
prohibited by the relevant authorities or legislation. Any claims arising out of or in connection with the terms and conditions of this disclaimer are governed by Dutch
law.
Press contacts:
Caroline Wroblewski
T
+31 70 378 1281
M
+31 6 30485111
E
[email protected]
Marlie Zuidgeest
T
+31 70 379 1314
M
+31 6 21494952
E
[email protected]
About NN Investment Partners
NN Investment Partners is the asset manager of NN Group N.V., a publicly
traded company listed on Euronext Amsterdam. NN Investment Partners is
head-quartered in The Hague, the Netherlands. NN Investment Partners in
aggregate manages approximately EUR 197 bln* (USD 219 bln*) in assets for
institutions and individual investors worldwide. NN Investment Partners
employs over 1,100 staff and is active in 16 countries across Europe, Middle
East, Asia and U.S.
On April 7 2015, ING Investment Management was renamed to NN Investment
Partners. NN Investment Partners is part of NN Group N.V., a publicly traded
corporation.
* Figures as per 30 June 2016
29
30