Fynsa
Without a doubt, 2021 has been a good year for risk assets, but also a very uneven year in terms of regional performance. While US stocks have yielded 25%, markets such as Europe and Japan within developed markets have underperformed at +10% and +1.49%, respectively. Not to mention the poor performance of emerging markets (-4.35%), affected by financial and regulatory crackdowns in China and a slowing economy.
What is striking about this dynamic is that while earnings growth for US companies is on track to reach a solid +45% in 2021, markets such as Europe and Japan are outperforming it at +65% and +48%, respectively. Even emerging markets are expected to show earnings growth of close to 60% in 2021. In other words, markets outside the US have been affected by a "multiples compression" rather than disappointing corporate dynamics.
The fact that the S&P 500 is leading stock returns can basically be explained by a U.S. economy that has proven to be a reliable source of growth. It has emerged from the pandemic stronger than anywhere else thanks to highly expansionary monetary and, above all, fiscal policy, while elsewhere things are moving more slowly. China's GDP growth has slowed, and in Europe, a wave of COVID-19 infections has led to some restrictions on commercial activities.
The question that follows, then, is: Will this dynamic continue in 2022?
An important part of the answer has to do with the development of the pandemic. Last week, we argued that the potential effects of the emergence of the Omicron variant were probably exaggerated, that while Omicron is likely to be more transmissible, early reports suggest that it may also be less deadly, which would fit the pattern of virus evolution observed historically. If these trends are confirmed, could the Omicron variant ultimately prove positive for risk markets, in the sense that it could accelerate the end of the pandemic? If a less severe and more transmissible virus quickly displaces the more severe variants, could the Omicron variant be a catalyst for transforming a deadly pandemic into something more akin to seasonal flu? Such a development would fit with the historical patterns (duration and number of waves) of previous respiratory virus pandemics, especially given the widespread availability of vaccines and new therapies that are expected to work on all known variants (Pfizer, Merck).
We believe that by 2022, the pandemic will be in further retreat, supported by high vaccination rates that should gain momentum and regional distribution, which should allow the global growth gap to narrow. As we have pointed out, the US economy has more than recovered, but other countries still have ground to make up and will eventually do so. Much of Asia's sluggishness is attributed to China's slowdown and not enough to the persistent effects of the pandemic in the region. In this regard, the fact that at the recent Poliburto meeting, China adopted language supporting the economy and the real estate sector seems to us to be the first step toward reversing this trend in 2022. Meanwhile, Europe has never fully reopened, and fiscal stimulus from the European Union's recovery fund is in the works. The United States could still lead, but the race will be closer.
From a tactical standpoint, we are optimistic about equities, given strong economic growth, solid earnings, and low bond yields.
Global economic growth is likely to remain above trend in 2022, andwe believe that equities in the eurozone and Japan, US mid-cap stocks, the global financial sector, commodities, and energy stocks will benefit from this.
Global corporate earnings are expected to grow by 10% in 2022. Within this forecast, we believe cyclical stocks will see the highest earnings growth rates, given their greater sensitivity to economic growth. In particular, we like the eurozone and Japanese equity markets, the global financial sector, and US mid-cap companies. We also favor commodities and energy stocks, which will also benefit if inflation proves more persistent than in our base case scenario.
For Japanese equities, we expect further easing of COVID-19 restrictions to boost both economic growth and investor confidence in Japan. The government of new Prime Minister Fumio Kishida is expected to push through a fiscal spending package worth approximately 4% to 5% of GDP. Monetary policy is also likely to remain relatively expansionary and contribute to further yen weakness. The TOPIX index is trading at 14 times expected 12-month earnings, making it cheap relative to the 18.6 times and 21.1 times multiples of the MSCI All Country World Index (ACWI) and the S&P 500, respectively.
After underperforming US equities every year for the past decade, eurozone equities are one of our favorite markets for 2022. The eurozone market is cyclical, so it is well positioned to benefit from the resolution of supply chain difficulties and inventory restocking. Investors' current positioning toward the region is light (only 3% of equity positions are in MSCI EMU stocks, compared to the eurozone's 9% weighting in the MSCI ACWI index). In the coming months, eurozone equities should be supported by expansionary monetary and fiscal policy and strong GDP and corporate earnings growth.
The global financial sector has historically performed well when yields have risen slightly. We expect 10-year U.S. Treasury yields to reach levels closer to 2% in 2022. Fundamentally, we believe financial sector earnings should be supported by stronger loan growth and credit quality, as well as the release of loan loss provisions.
We expect commodity prices to stabilize in 2022. But many commodity-linked stocks have yet to discount a prolonged period of high prices. For example, energy stocks are estimated to still only be pricing in a long-term Brent crude price of $60/barrel.
We also see value in industrial metals, particularly copper, which are expected to benefit from the transition to net-zero carbon emissions. This could prompt a more active approach to commodity allocation, which in turn would offer investors a hedge in case commodity supply issues lead to more persistent inflation.
Investment decline
Humberto Mora
FYNSA Strategy and Investments
