2020 global market outlook press briefing · 11/19/2019 · 2020 global market outlook press...
TRANSCRIPT
2020 Global Market Outlook
PRESS BRIEFING
International Equity
Justin ThomsonPortfolio ManagerChief Investment Officer, Equity
November 19, 2019
2
Opening Comments
International equity markets have serially lagged U.S. markets over the last 10 years
This year has seen a continuation of this underperformance as global economies have slowed and international earnings have been disproportionately affected by the U.S.–China trade dispute
With political headwinds potentially becoming tailwinds, there is reason to believe that growth and inflation expectations have now bottomed
The cyclical conditions for international equities to outperform are present
Structural merits for international markets exist, both in developed and emerging markets
3
As of 31 October 2019
Past performance is not a reliable indicator of future performance.US – S&P 500 Total Return Index, EM – MSCI Emerging Markets Net Total Return Index, Global Agg – Bloomberg Barclays Global Aggregate Bond Index, EM FX –JPM Emerging Markets Currency Spot Index, EAFE – MSCI EAFE Total Return Index. Sources: FactSet Global, S&P, Bloomberg, JP Morgan, MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Information has been obtained from sources believed to be reliable by J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2019, J.P. Morgan Chase & Co. All rights reserved.
Year-to-Date Returns
95%
100%
105%
110%
115%
120%
125%
Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19
US EM Global Agg EM FX EAFE
4
Sources: JP Morgan, IHS Markit, Haver Analytics. Copyright © 2019, Markit Economics Limited. All rights reserved and all intellectual property rights retained by Markit Economics Limited.
As of 30 September 2019
GLOBAL PURCHASING MANAGERS’ INDEX (PMI)
Purchasing Managers’ Index
49
50
51
52
53
54
55
56
Jan-
15
Apr-
15
Jul-1
5
Oct
-15
Jan-
16
Apr-
16
Jul-1
6
Oct
-16
Jan-
17
Apr-
17
Jul-1
7
Oct
-17
Jan-
18
Apr-
18
Jul-1
8
Oct
-18
Jan-
19
Apr-
19
Jul-1
9
Services Manufacturing July 6, 2018 – U.S. implements first China-specific tariffs
PMI (
>50
= Ex
pans
ion)
5
Equity Market Earnings Growth Revisions
Source: Morgan Stanley Research, used with permission. MSCI US – MSCI United States Total Return Index, MSCI Europe – MSCI Europe Total Return Index, MSCI EM – MSCI Emerging Markets Total Return Index, MSCI Japan – Total Return Index. Earnings revision ratio calculated as (# of upgrades - # of downgrades)/(# of estimates)
As of 31 July 2019
NEXT 12 MONTHS’ EARNINGS REVISION RATIOS (3-MONTH MOVING AVERAGE)
Earn
ings
Rev
isio
n Ra
tio
Earn
ings
Rev
isio
n Ra
tioEa
rnin
gs R
evis
ion
Ratio
Earn
ings
Rev
isio
n Ra
tio
U.S. EUROPE
JAPAN EM
6
As of 30 September 2019
Past performance is not a reliable indicator of future performance.Source: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. Statistical Office of the European Communities, Haver Analytics, MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. Thisreport is not approved, reviewed, or produced by MSCI.
Europe: Sectoral Mix Weighs
EUROPEAN UNION: GROSS DOMESTIC PRODUCT VS. EARNINGSJan 2004 – Sept 2019
MSCI EU INDEX: EARNINGS PER SHARE IN ENERGY, MATERIALS, AND FINANCIALS Jan 2000 – Sept 2019
€2,900
€3,100
€3,300
€3,500
€3,700
€3,900
€4,100
€2
€4
€6
€8
€10
€12
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Real
GDP
in B
illio
ns
Last
12
Mon
ths’
Ear
ning
s per
Sha
re
MSCI EU Index EPS (L)European Union Real GDP (R)
€ 0
€ 5
€ 10
€ 15
€ 20
€ 25
€ 30
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Earn
ings
per
Sha
re
Energy Materials Financials
7
- 50
100 150 200 250 300 350 400
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
EBuyback Dividend R&D CAPEX
As of 31 October 2019
Source: Citi Research. All rights reserved.
Markets Prefer Payouts to CAPEX
- 200 400 600 800
1,000 1,200
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
E
Buyback Dividend R&D CAPEX
U.S. INVESTMENT AND PAYOUT (US$bn)
JAPAN INVESTMENT AND PAYOUT (Yen Trn)
U.S. IT INVESTMENT AND PAYOUT (US$bn)
ASIA IT INVESTMENT AND PAYOUT (US$bn)
- 10 20 30 40 50 60
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
E
Buyback Dividend R&D CAPEX
-
50
100
150
200
250
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
E
Buyback Dividend R&D CAPEX
8
Markets Prefer Payouts to CAPEX
R² = 0.30
6
8
10
12
14
16
18
20
0 1 2 3 4 5 6
2019
E P/
E
CAPEX/Payout Ratio (2018E)
Source: Citi Research using FactSet estimates. All rights reserved
As of 31 October 2019
INVESTMENT/PAYOUT VS. P/E 2019
Cons StaplesSwitz IT
Health CareUSUS ITAust
Japan
TaiwanIndustrials
Cons Disc.
India
S. AfricaFrance
EnergyUtilities
China
Materials
TelecomsGermany
BrazilMining
Asia IT Korea
Russia
UK
9
As of 31 October 2019
Source: Financial data and analytics provider FactSet. Copyright 2019 FactSet. All rights reserved.World – MSCI AC World Index, Europe – MSCI Europe Index, U.S. – S&P 500 Index, Japan – TOPIX Index.Source for MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
Return on Equity Across World Markets
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
World Europe US Japan
Retu
rnon
Equi
ty
10
200
300
400
500
600
700
800
900
1000
1100
20
30
40
50
60
70
80
90
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
2018
2022
2026
2030
2034
2038
2042
2046
2050
2054
2058
2062
2066
2070
2074
2078
2082
2086
2090
2094
2098
Japan (LHS) China (RHS)
Sources: Nomura, United Nations Department of Economic and Social Affairs, Population Division (2019), Haver Analytics. Used with permission. Note: The Chinese National Statistical Office defines the working age population as people age from 15 to 59.
As of June 2019
WORKING AGE POPULATION (15‒59) IN CHINA AND JAPAN
China May Grow Old Before It Grows Rich
ForecastActual
(Million People) (Million People)
11
As of 31 October 2019
Sources: Nomura Research Institute, based on the data from IMF World Bank; United Nations; Haver Analytics.
China: Can It Escape the Middle-Income Trap?
1200000
1250000
1300000
1350000
1400000
1450000
1500000
0
5000
10000
15000
20000
25000
30000
3500019
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
1020
1120
1220
1320
1420
1520
1620
1720
1820
1920
2020
2120
2220
2320
2420
2520
2620
2720
2820
2920
3020
3120
32
China: Adjusted net national income per capita (LHS) Population (RHS)
Middle-Income Trap
Population Peaks in 2031
(Thousand People)(US$)
Yearly per Capita GDP Growth: 5%Yearly RMB Appreciation: 2%
Yearly per Capita GDP Growth: 6.5%Yearly RMB Appreciation: 3%
12
Sources: China National Bureau of Statistics, OECD, Haver Analytics.
As at 31 December 2018
HOUSEHOLD DISPOSABLE INCOME – URBAN (RMB)
China: The GDP That Really Matters
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Purc
hasi
ng P
ower
Par
ity (A
djus
ted
EUR)
RMB
13
Source: T. Rowe Price calculations using data from Bloomberg Finance LP. All rights reserved.
Stock of Negative-Yielding Debt
24% OF BONDS IN THE WORLD TRADE AT NEGATIVE INTEREST RATESAs of 31 October 2019
Mar
ket V
alue
(US
$tn)
% o
f Bon
ds O
utst
andi
ng
0%
5%
10%
15%
20%
25%
30%
35%
0
2
4
6
8
10
12
14
16
18
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Jan-
13M
ay-1
3Se
p-13
Jan-
14M
ay-1
4Se
p-14
Jan-
15M
ay-1
5Se
p-15
Jan-
16M
ay-1
6Se
p-16
Jan-
17M
ay-1
7Se
p-17
Jan-
18M
ay-1
8Se
p-18
Jan-
19M
ay-1
9Se
p-19
Global Negative yielding debt, Market Value (USD tn) (LHS)
Global Negative Yielding Debt as a market share of all bonds outdtanding (%) (RHS)
14
As of 31 October 2019
Copyright © 2019, Markit Economics Limited. All rights reserved and all intellectual property rights retained by Markit Economics Limited.
Reflation Trade: PMIs Versus Financial Conditions
Global M
anufacturing Purchasing Managers’ Index
Fina
ncia
l Con
ditio
ns In
dica
tor
GLOBAL PMI VERSUS FINANCIAL CONDITIONS INDICATOR
15
Copper-Gold Price Relative
0
2
4
6
8
10
12
14
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Copp
er-to
-Gol
d Pr
ice
Ratio
(X)
Ratio Minimum ratio
Source: T. Rowe Price calculations using data from FactSet Research Systems Inc. All rights reserved. Ratio between LME Copper Cash Official Price (US$/mt) and Gold NYMEX Near Term Price (US$/ozt).
As at 31 October 2019
COPPER-TO-GOLD PRICE RATIO
16
U.S. Versus EAFE
-50%
0%
50%
100%
150%
200%
250%
300%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Cum
ulat
ive
Retu
rns
MSCI EAFE Index MSCI EAFE Index in Local Currency S&P 500 Index
As at 31 October 2019
Past performance is not a reliable indicator of future performance.Sources: T. Rowe Price, MSCI, S&P. Cumulative monthly returns rebased as at 30 September 2009. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
17
Sources: BofA Merril l Lynch Global Research, Angus Maddison (University of Groningen) (Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD), IMF.
As at December 2017
GLOBAL SHARE OF GDP (PPP)
Crouching Tiger, Hidden Dragon?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 1000 1500 1600 1700 1820 1870 1900 1913 1940 1950 1960 1970 1980 1990 2000 2010 2017
22%
24%
18%
7%
Others
Africa
Latin America
Rest of Europe
China
IndiaJapan
United Kingdom
United StatesFrance
Former USSR
ItalyGermanySpain
18
0%1%2%3%4%5%6%7%8%
UK
US
Aust
ralia
Eur x
UK
Japa
n
EMBuyback Yield Dividend Yield
As of 31 October 2019
Sources: Citi Research, 2019 Citi estimates, MSCI, Worldscope. All Rights Reserved.
Regional Valuations
CURRENT VALUATIONS OF MAJOR STOCK MARKETS
CYCLICALLY ADJUSTED PRICE TO EARNINGS (CAPE) RATIO(ABSOLUTE)
PAYOUT YIELD (DIVIDEND YIELD + BUYBACK YIELD)
FREE CASH FLOW YIELD (2020 EST)
US UK EurxUK JP GEMPE 21.1 13.8 17.3 13.3 13.2PBV 3.4 1.7 1.9 1.3 1.6CAPE 30.1 17.1 21.1 21.3 15.6DY 2.0 4.7 3.3 2.5 2.9fwd PE 17.4 12.2 14.4 13.3 12.0
0%1%2%3%4%5%6%7%8%
UK
Japa
n
Eurx
UK
US
EM
Aust
ralia
0102030405060
95 97 99 01 03 05 07 09 11 13 15 17 19
USA CAPE Rest of World CAPE
US expensive vs Rest of World
19
Conclusion
International Equity Markets have serially lagged U.S. markets over the last 10 years through a combination of structural factors, currency, widening valuation disparities, and cyclical factors
This year has seen a continuation of this underperformance as Global Economies have slowed and international earnings have been disproportionately affected by U.S.–China trade dispute
Eighteen months into a CAPEX recession, eight months into an inventory correction, and with political headwinds potentially becoming tailwinds, there is reason to believe that growth and inflation expectations have now bottomed
Under these circumstances and given undervalued currencies, we believe the cyclical conditions for International Equities to outperform are present
Structural merits for International markets, both in Developed and Emerging Markets, include rising innovation, better corporate governance models, better demographics (EM), and potential for valuation catch-up
20
Important Information
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are those of the authors as of November 19, 2019, and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal.
All charts and tables are shown for illustrative purposes only.
T. Rowe Price Investment Services, Inc., Distributor.
© 2019 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.
201910-987569