Prudential sees late-cycle equity value
The strength of earnings growth late in
the cycle will be one of the key investment themes in 2017, according to
Prudential Portfolio Management Group (PPMG), but the benefits will not be
spread evenly around the world.
Japan was
highlighted as market where Prudential expects an earnings recovery expected to
come through late in the cycle.
David
Shairpe, head of research, said: “The late-cycle reacceleration tends to favour
the more cyclical equity markets – those that will see a jump in earnings in
response to a pickup in activity and in response in a pickup in their top
lines.”
The US is at
the other end of the spectrum after its rapid rise over the last 12 months. The
investment environment in the US is mature, said Shairpe: “In terms of
valuations, they are very stressed.”
“Our view is
that the US is pretty fully-priced. US equities are richly priced and that
comes through fairly consistently.” Shairpe added that the case for the US, if
there even is one, is a turn in the earning cycle. But in his view, there is
not a “compelling enough case.”
The US
equity risk premium has fallen to 3%, which is the lowest on this series since
July 2004. “We don’t see a massive amount of value,” Shairpe said.
The outlook
is for 2017 is brighter than it has been in recent years largely due to the expectation
for expansionary fiscal policy. While Prudential expects fiscal easing to
materialise, it does not expect it in the first half of the year.
In Japan the
central bank’s monetary policy becoming less effective so the government may be
forced to turn to more expansionary fiscal policy to boost demand. The same
situation exists in the eurozone.
“Monetary policy
cannot be the only spur for economic growth,” said Leila Butt, senior economist
at Prudential. “It must be in tandem with fiscal policy and structural reform.”
Eurozone
growth has been more tepid than in the US and the UK. “Accommodative monetary
policy, less restrictive fiscal policy and an improving labour market will act
to sure up eurozone growth such that it pushes growth by 1.5% this year,” said
Butt.
Meanwhile,in
the US, on the back of the incoming Republican administration, expectations for
more fiscal policy have already resulted in a late-cycle spurt to growth.
Conditional on the actual fiscal stimulus, Prudential expects the Fed to tighten
monetary policy with three 25 basis points (bps) hike rates this year.
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