Accommodative policy moves by global central banks give us an optimistic view of equities heading into 2020.
- Accommodative policy moves by global central banks give us an optimistic view of equities heading into 2020.
- European stocks, most notably in financials, could be boosted by better earnings growth and the potential for accretive merger & acquisition activity that should help close the valuation gap with U.S. equities.
- Emerging markets stand to benefit from progress on the U.S.-China trade dispute and the prospects for a weakening U.S. dollar.
European, Emerging Markets Stocks Positioned to Surpass Low Expectations
Economic sentiment in most regions worsened over the course of 2019, which we believe sets a low bar for global equities heading into 2020. Manufacturing data continued to weaken, yet consumers held up relatively well. We see reasons for optimism that are underpinned by policy moves. The European Central Bank has resumed a measured program of quantitative easing, the U.S. Federal Reserve has lowered interest rates while China and Japan continue to provide ample liquidity to their economies. In past cycles, increasing money supply has supported stock values after a several month lag, with the manufacturing sector picking up soon after. If we do not see a hardening of the U.S.-China trade war, this could be the case again.
Valuations in the United Kingdom and Europe are attractive, particularly compared with U.S. equities (Exhibit 1). European stocks are at 50-year lows vs the U.S., which has represented a good entry point the last two times performance dispersions became this extreme. Near-term risks in Italy are contained for now with a new moderate government in place. Fiscal stimulus is being discussed within the EU, which would be a clear positive. Brexit remains a wild card with Prime Minister Boris Johnson awaiting the results of December elections after his initial Brexit deal was rejected by Parliament and the EU granting an extension for a deal until the end of January.
Exhibit 1: European Stocks Historically Cheap vs. U.S.
Source: FactSet, as of 9/30/2019. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. U.S. stocks are represented by the MSCI USA Stock Index. European stocks are represented by the MSCI Europe Stock Index.
Earnings growth has not been particularly robust in developed markets but there is good opportunity for that to improve in 2020. Earnings were quite good in Japan last year, but not so in Europe. Equities have done well on the Continent more due to forward looking expectations and multiple revisions. We are looking for earnings growth next year in the eurozone, with consensus numbers between eight and ten percent. Better earnings, however, will be dependent on what happens with manufacturing and the U.S. dollar (USD). A weaker USD would be beneficial for European, emerging markets and any export-driven businesses.
Japan, China and emerging markets are very dependent on progress in trade talks. A positive trade resolution should cause the USD to decline against other currencies. How Beijing deals with the protests in Hong Kong and the ongoing trade standoff will provide important signs of where the global economy and equity markets are headed. Geopolitical risks are a constant and we can take advantage in positioning our portfolios.
Emerging markets underperformed relative to developed markets this past year, which we believe is a good setup going forward. We have seen some good performance out of small cap emerging market stocks recently and continue to find interesting ideas in the space.
Other drivers of global equity performance in 2020 where we are constructive include merger & acquisition activity, especially in Europe where company balance sheets are in very good shape. We also see potential in selective cyclical sectors such as European banks, which should benefit from higher loan growth and eventually better yields. We gained exposure to large cap pharmaceuticals in 2019 at very attractive rates and we expect our positive thesis on the industry and other positions in health care across developed and emerging markets will continue to play through in the year ahead.
"Brexit" is a shorthand term referring to the UK vote to exit the European Union.
Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.
The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency.
The European Union (EU) is an economic and political union established in 1993 by members of the European Community.
The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
Mergers and acquisitions (M&A) is a general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.
The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
The MSCI World Index is an unmanaged index of large- and mid-cap common stocks across 23 developed market countries.
The MSCI USA Index is an unmanaged index of common stocks designed to broadly and fairly represent the full diversity of business activities in the United States.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
All investments involve risk, including possible loss of principal.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors and eligible counterparties in EU and EEA countries:
In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4. D04 EP27, Ireland. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.
In the UK, this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the UK Financial Conduct Authority.
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.
Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China (“PRC”):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia and New Zealand:
This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827). The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.