International recovery ready for liftoff
Reasons why global markets are poised to outpace the U.S. this year.
As vaccine rollouts spread, lockdowns end and a synchronized global recovery ensues, the Federated Hermes international equity team sees strong prospects for all global markets to outpace the U.S. this year, abetted by GDP and earnings growth that are well above historical trends. We also think Asian economies, led by China, will deliver the strongest economic performance.
The factors we are weighing to form our international outlook include:
- A rotation to value stocks The cyclical recovery and rising rates should provide ongoing support for the shift from growth to value stocks, which tend to perform their best during the earlier stages of an economic recovery. This anticipated value rotation should benefit the more stylistically value-heavy international benchmarks, particularly the MSCI EAFE and U.K. FTSE 100 indexes.
- Solid consumer spending The global consumer remains in pretty good shape as many international government furlough programs provided the bridge they needed to survive the pandemic. As in the U.S., household savings rates in the developed international economies are at all-time highs and should provide added stimulus to economic growth as lockdowns are lifted.
- Strong manufacturing Global manufacturing PMIs have increased each of the last eight months, business confidence levels are elevated and consumer confidence is improving.
- Low political risk The overall global political environment is stable, with most risk concentrated in emerging markets, especially Brazil.
Among regions, we’re positive on both Asian emerging-market (EM) economies and equity markets, anticipating each will grow faster than the baseline global rates. We’re more subdued about Latin America EM countries, as we think the threat of rising inflation may force their central banks to raise interest rates. Also, recent political strife in Brazil could weigh on equity returns.
In developed markets, we continue to hold a neutral/positive outlook for both the eurozone economies and equity markets. This is one area where we believe there could be a surprise to the upside. Although investor sentiment remains subdued and investment flows have been negative, our view is estimates likely will be revised upward as lockdowns are lifted and flows pick up once the rotation to value gains momentum.
After years of negative sentiment, our outlook on the U.K. has improved. We now rank its economy and equity markets neutral/positive. With Brexit in its rearview mirror, we believe the U.K. equity market may experience both earnings growth and multiple expansion. We’re maintaining a similar neutral/positive outlook on Japan. Led by its manufacturing sector, it should continue to benefit from growth in China and other Asian economies. Its central bank also remains extremely supportive.