Desde Robeco:
Pero solo en esos actives con mayor volatilidad…
Every year Robeco takes a fresh look at the outlook for the global economy over the next five years. Our analysis gives a prognosis for the major asset classes and three potential scenarios (baseline, stagnation and high growth).
+ Hopes of monetary policy returning to normal in 2016 were shattered
+ Sentiment among professional investors is extremely weak
+ We continue to believe a gradual normalization is the most likely scenario
In December 2015, when we first set out to discuss this year’s edition of our annual Expected Returns publication, we were in good spirits. The European economy had surprised everybody by growing above trend, the global economy was picking up and the Fed’s first interest-rate hike had not derailed markets as many had feared. The process of monetary normalization was all set to begin.
Sure, there were issues; there always are. The ongoing decline in the oil price; positive for consumers, perhaps, but worrying for financial markets. A growing consensus among economists that increasingly high debt levels could lead to an adverse debt cycle. And the meltdown in emerging markets with the Brazilian and Russian economies shrinking significantly (by 3.8% and 3.7% respectively in 2015), plus a Chinese growth path that was looking increasingly unsustainable. But it was nothing we couldn’t handle.
Black clouds
Eight months on and our spirits are not in such good shape. The hoped for normalization evaporated after a solitary rate hike by the Fed. Falling oil prices have hit the positive impetus driving the US economy and the outlook has become more uncertain. External factors have also curbed the Fed’s desire to hike rates: uncertainty about China, financial market volatility and a major negative blow in the form of the Brexit vote. This shattered any hopes of monetary policy returning to normal, causing the UK to follow in the footsteps of the ECB and Bank of Japan and start quantitative easing. So unless we now regard QE as the new normal, it is clear that 2016 is not set to become the year of monetary normalization.
Is this just another temporary setback, or should we succumb to one of the numerous credible doom scenarios: disintegration of the European economy (Brexit, the rise of populist parties, Italian banks), Chinese hard landing (unsuccessful rebalancing of the Chinese economy, high debt), rise in protectionism (the Trump factor), loss of central-bank credibility (Japan), and the bursting of the debt bubble. After all, we’re spoilt for choice.
It’s always darkest just before dawn
But are things really so bad? You could be forgiven for thinking they are. Our impression is that sentiment among professional investors has probably never been as weak as it is right now. This is corroborated by what the financial markets have priced in: average inflation expectations in the European market for the period 2021-2026 are as low as 1.25%. Looking at the West-German track record (renowned for its tough inflationary stance), such a five-year average is pretty rare. Possible? Sure. But likely? Well, only if you really are very pessimistic about the future. And this is exactly the point we want to make.
Pessimism is a risk in itself. There is plenty of self-reinforcing momentum in the way economies work, so a move in one direction is not easily reversed. Once growth weakens, producers and consumers become more cautious, investment, employment and consumption levels all contract, reinforcing the downward trend.
Stock markets normally hit bottom when things are at their bleakest. If earnings evaporate, companies collapse, people get fired and there is talk of ‘the end of capitalism as we know it’, that’s when the tide turns. The bad news may still continue, but the market has by then already discounted it. The bleaker the expectations, the better the odds that the surprise will be a positive one.
It’s always darkest just before dawn. And if the mood of investors is anything to go by, it is already pretty dark out there.
Baseline scenario
Despite just how tempting it is to succumb to this general feeling of pessimism, we continue to believe that a gradual normalization is the most likely scenario. Call us optimists if you like. One fact overlooked by many is that – despite low growth – labor markets have strengthened and unemployment rates in the leading economies are below their longer term averages. In this scenario, consumers with a disposable income boosted by oil price falls should play a central role. Mind you, given the underlying growth and inflation assumptions, we are not predicting anything spectacular: the global economy will grow by roughly 3%, inflation will reach an average of 2.5% for the world as a whole and 2% for the developed countries. But we are well aware of the risks in the current environment and the 60% likelihood we attach to our baseline scenario reflects this.
The table summarizes our forecast for the broader asset classes. We are not particularly positive on government bonds and have lowered our five-year expected return on AAA European government bonds to -3.5% (2015: -3.0%). Yields have dropped to even lower levels than last year, giving less of a buffer when adverse price movements occur. This -3.5% is, however, based on the German ten-year benchmark, which has almost the lowest yield out there. Our projections for the US indicate a -0.25% negative return (local currency), while peripheral European bonds also offer better value. We have increased our five-year target for developed market equities to 6.5% (2015: 5.5%), reflecting lower equity valuations worldwide.
Stagnation scenario
We have become more cautious and this is reflected in the increased likelihood we have given our stagnation scenario (from 20% to 30%). Here, we expect global economic growth to decline to 1.6%, half the level seen over the past five years. Some areas will be hit by recession, China will hit zero growth and then see a subdued recovery. Inflation will drop to an average of 1%, but would reach deflationary average levels without the contribution of emerging markets. The Western world will sink into a Japan-like scenario. Unlike the baseline, in this adverse growth scenario bonds remain the place to be, offering the only value for money.
High growth scenario
In our optimistic high growth scenario (10%), the US and the Eurozone economies expand rapidly, initially boosted by consumption and later by investment too. The global economy enters a virtuous circle and debt ratios fall. China successfully rebalances its economy and growth in Japan accelerates. Average real global economic growth will reach 3.5%. Perhaps not high compared to the 3.25% of the past five years, but if we take aging and the lower Chinese growth rate into account (6% compared to 8.5% in 2010-2015), it means growth will rise above its underlying potential. Inflation poses the main risk causing bonds to suffer and depressing stock performance somewhat, as wage and financing costs hurt margins.
Y para los mercados emergentes:
In the past two decades emerging markets have experienced bust, boom and lately a more stable phase. Not surprisingly, investors now wonder whether it is still worth investing in the region.
+ Earnings per share growth in emerging markets will edge up to 4.5%
+ Slightly higher dividend yields of around 3.25% in the next five years
+ We prefer a cautious overweight for emerging market stocks
High expectations in terms of returns have not been met in recent years by emerging markets, while volatility has remained elevated. This poor relative performance has led to significant outflows, causing emerging equities to become unloved, under-owned and cheap. Have we reached the end of this period of poor performance, or is there a good argument to part with emerging equities altogether?
Earnings growth will contribute again
What will happen in emerging countries in terms of productivity during the next five years? On the positive side, we think there will be a number of factors to support growth in the emerging economies. We expect the commodity markets to enter a new phase following the rout in commodity prices of the past two years. Global aggregate demand is expected to increase in our base scenario and the pickup from current subdued global trade levels should benefit emerging markets. Domestic consumption in emerging markets will contribute. Emerging market currencies are significantly undervalued and we expect this to feed into stronger earnings.
But there are also a number of serious headwinds. China and South Korea are maturing and are entering a phase of diminishing returns following earlier economic reform activities and capital accumulation. Commodity exports are expected to remain a dominant driver behind economic activity in emerging markets and a decline in the commodity intensity of global growth will also cap the upside for emerging market productivity gains. And emerging economies are lagging behind developed markets when it comes to rule of law, regulatory efficiency, fiscal freedom and market transparency.
In summary, although we do expect a stabilization in (cyclical) productivity growth, it is unlikely that growth will return to pre-financial crisis levels. This implies less upside for earnings from a productivity perspective.
Cyclical sources brighten earnings prospects
As productivity is unlikely to rebound to previous levels, what can we expect for earnings from a cyclical perspective? Although we are somewhat more positive here, one hurdle is the oil price. The US is now a shale oil producer and marginal supplier, and China is making a shift towards becoming a more service-oriented economy. This means we don’t expect the windfall for emerging market commodity exports which we have seen in the past.
Having said that, margins are not particularly high in emerging markets. The profit cycle has room to improve significantly as emerging markets start to benefit from the improved competitiveness resulting from the strong depreciation of most of their currencies. All in all, we expect earnings per share growth in emerging markets to edge up to 4.5%.
“A cautious stance is warranted for emerging markets”
Repricing – reviewing the valuation argument
One of the main reasons for optimism in the case for investing in emerging markets today is that they are cheap. On the face of it, the MSCI Emerging Markets Index shows a discount of 25% on a standard price to earnings (P/E) basis compared to the global benchmark. This observation is a powerful plus point for emerging markets, as low valuations bode well for outperformance relative to developed markets in the next five years.
However, despite this optimism on valuations, we must examine whether the current deep discount in emerging markets is largely due to excessive investor pessimism or whether stocks are cheap for a reason with the discount merely reflecting underlying macro risks?
Recently observed macro risks such as the rout in the commodity markets, strong US dollar appreciation and slowing Chinese growth could all be viable explanations for this significant discount. Our research shows that the market has in particular priced in a ‘China factor’ as a systematic risk and this has, in part, shaped the emerging valuation discount since 2011, when the landing phase in China became apparent.
Dividend yield remains stable factor
The return component that has become increasingly attractive during the landing phase is the dividend yield. This is 3.0% for the MSCI EM Index, 20 basis points above the current dividend yield of the MSCI AC World Index. This dividend yield differential corresponds with the average seen over the past 20 years. The dividend yield depends on earnings (which we do expect to pick up from current levels), payout ratios and stock prices. Payout ratios are not fixed and are largely a function of corporate capital expenditure. We think overall capex in emerging markets is lower when commodity markets enter an exploitation phase. This raises the payout ratio in conjunction with a somewhat higher expected earnings yield. Adding both these forces together, we expect slightly higher dividend yields of around 3.25% in the next five years.
Emerging markets relatively attractive
Are emerging markets the ‘grain which will grow’ in the next five years? Our analyses suggest that a cautious stance is warranted. We do not expect multiple expansion over the next five years and expect the discount of emerging markets relative to developed markets to increase further as uncertainty about China sets in. We do expect an improvement in corporate profitability compared to developed markets, but with the emphasis on earnings growth, returns will probably be highly volatile. However, we also observe that the return prospects for developed market investors are brighter as emerging market currencies are expected to appreciate against developed market currencies. Overall, we prefer a cautious overweight for emerging market stocks relative to their developed market counterparts.
Expected five-year returns for emerging market equities
Abrazos,
PD1: Interesante esta tabla que muestra los rendimientos reales dependiendo de cada tipo de activo. Aunque nunca hemos tenido unos rendimientos negativos en bonos, por culpa de la política monetaria super expansiva, como hasta ahora…
PD2: “Tener hijos no lo convierte a uno en padre, del mismo modo en que tener un piano no lo vuelve pianista”, lo dijo un tal Michael Levine, que no tengo ni idea quién es. Pero es una gran verdad. ¡Ay de esos padres que no hacen caso de sus hijos, que no se involucran, que lo tienen todo delegado en la madre, so pretexto de no tener tiempo para nada, que llegan demasiado cansados del trabajo, que no van a ver a los profesores en las tutorías, que les compran su cariño con tonterías, que se excusan ante sus hijos y les tratan de compensar con media hora el fin de semana…, ay!!!
Hace años, en mi niñez, los padres llegaban a casa y pedían un whisky; ahora llegan más tarde a casa para evitar hacer lo que otros muchos hacen, los baños, la cena, los deberes…, ufff, qué pereza les da!!!
Ánimo, se puede, se debe educar a los hijos con nuestro tiempo, se debe encontrar tiempo de calidad, no seamos rácanos…, y sin tener el móvil encendido, por favor!!!
