Send the word over there Send the word over there http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\river-france-sunset-small.jpg June 1 2021 May 25 2021

Send the word over there

The recovery is coming to Europe. Latin America may be next.

Published May 25 2021
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The international landscape continues to brighten, with accelerating vaccinations, fewer lockdowns, rising consumer spending and broadening economic activity supportive of higher corporate profits and equity prices in the months ahead. That’s the judgment of the Federated Hermes International Outlook Committee, which has raised its view on Europe as well as Latin America. As with the domestic equity team’s take in the U.S., the committee thinks value-oriented, cyclical names in the international arena should benefit more relative to growth and momentum stocks over the next six months as the recovery migrates across oceans and borders. As for specific regions, the committee:

  • Raised its outlook for the eurozone. Vaccination rates on the continent are gaining momentum, with as many people being vaccinated in April as were inoculated in the previous three months. It’s estimated that nearly 70% of the euro area’s adult population will be vaccinated by the end of June. On the macro front, manufacturing PMIs have moved well above expansionary levels, with factories at full capacity as they work feverishly to replenish inventories. Consumer and business confidence are elevated, with April retail sales jumping a much better-than-expected 12% year-over-year (y/y). First-quarter earnings soared 42% y/y on average, with a record 70% of Stoxx 600 companies beating expectations, and both Q2 and full-year 2021 estimates are experiencing strong upward revisions. On the policy front, 750 billion euros of European Central Bank stimulus should add to tailwinds as proceeds are disbursed in the second half.
  • Is positive on the U.K. economy and equities. With 70% of Britain’s adult population receiving at least one dosage, lockdowns are rolling back, retailers and restaurants are reporting record sales—May retail sales ran 42% above year-ago levels—and both manufacturing and services PMIs are deep into the expansionary territory, with both sitting above 60. Unemployment continues to fall, sentiment continues to rise and prospects for equities arguably offer attractive potential—relative to its global peers, the FTSE 100 is trading at its lowest level in in 20 years. Historically when the index trades at such levels, it has tended to outperform the rest of the world over the next 12 months.
  • Lowered its view of the Japanese economy and stocks. The overall outlook in Japan remains positive but is trending toward neutral on a stubbornly high Covid infection rate, states of emergencies in Tokyo and other prefectures, and a surprisingly slow vaccine rollout. It’s still not certain the Summer Olympics, slated to start in two months, will happen. Even if the games are held, Japan’s summer tourist business is certain to be very limited. On a more positive note, Japan has approved both the Moderna and AstraZeneca vaccines and, abetted by its strong manufacturing base, remains the beneficiary of the global recovery. Moreover, the Bank of Japan continues to be highly accommodative.
  • Is slightly less positive on Asian emerging markets (EM). First to reopen and recover, these countries are now seeing their economies plateau. Q1 GDP soared 18.3% y/y in China, in part on the base effect that saw last year’s extraordinary contraction in first-quarter GDP roll off but also on a surge in export-related manufacturing on the V-shaped rebound in global economies and trade. Chinese monetary policy is tightening, money supply is shrinking and a heightened regulatory environment for Chinese tech companies represents a headwind for investor sentiment. Overall, however, the combination of a stronger U.S. demand and a weaker U.S. dollar should support Asian economies, though rising infection rates outside of China remain a worry and need to be brought back under control.
  • Sees more upside for Latin American EM relative to Asian EM. Due to continued rises in Covid infections and inadequate vaccine rollouts, Latin America’s recovery has been delayed but second-half due improvements are anticipated, which we think will prompt a snapback in Latin American economies and equities. Higher commodity prices represent a strong tailwind, with recovering U.S. and developed international economies also a plus. That said, inflationary pressures are building and political risks remain high, with presidential elections in Peru next month, Chile in November, and Brazil and Colombia next year.
Tags International/Global . Equity . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

FTSE 100: The Financial Times Stock Exchange 100 Index, aka the FTSE 100 or FTSE, is a capitalization-weighted index consisting of the 100 largest companies, ranked by market cap, listed on the London Stock Exchange. Indexes are unmanaged and investments cannot be made in an index.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging-market and frontier-market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets.

Stoxx Europe 600 is an index representing large-, mid- and small-capitalization companies across 18 countries in the European region. Indexes are unmanaged and investments cannot be made in an index.

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