Equities: A Few Reasons to be Optimistic in 2019
Market Insights | Investment Solutions

Paul Ashworth, Managing Partner David Clark, Director Campbell Cooke, Senior Analyst

The past 12-months have marked a turning point for global equity markets, as they experienced the first retraction in Price-Earnings (PE) multiples since 2011.
Posted 11 February 2019

The previous seven years have been notable for the low dispersion in individual company returns, as the wave of easy monetary policy (falling rates) drove up valuations across the board. Now that the loosening cycle is over, market indexes in the US, UK and Australia have all fallen to near or below long-term averages.

Looking forward we see limited scope for global equities to re-rate to the levels seen in 2017/18 given rising yields and tempered global growth, which means corporate earnings growth will be key to future performance. Whilst we do not expect to see a repeat of the supercharged earnings growth seen in 2018, we believe that the consensus view for global earnings per share (EPS) growth at 8.91% (5% below historical averages) is too pessimistic. This leads us to be more optimistic on equity returns in the next 3-year period (see our Valuation Matrix below).

As we assess the attractiveness of investment between different countries, our key criteria is the ability for each respective market to generate corporate earnings growth (EPS) above consensus views.

The US is our preferred region as we believe the economy will continue to deliver strong consumer demand that should enable corporates to continue to generate EPS growth.

Our strategy is weighted toward companies with strong balance sheet positions and higher than average interest coverage. Should issues in the corporate bond market arise, our investments should be able to weather the storm.

We have been reducing our weighting to Australian equities throughout 2018 and remain unconvinced on the economy’s ability to ‘shake-off’ a debt hangover. The economy can be expected to ‘muddle through’ with falling per capita spending lifted by stable total spending that is supported by population growth. This distinction, aggregate vs. per capita, will contribute to a significant divergence between sectors that have relied upon expanding credit markets and those that are tied to population growth, such as toll roads and healthcare.

Overall, we are neutral on the UK. The fall in valuation and emergence of bright spots in the economy are enough to stay encouraged at the ability of our investments to generate EPS outperformance. However, the significant uncertainty surrounding the possible Brexit deal with the European Union necessitates a cautious approach.

Our Matrix compares current valuations (PE ratio) to consensus estimates of corporate earnings growth in the next 12-months. The comparison is taken on a relative basis to historical averages, for example, earnings growth in 2019 is forecast at 8.91% compared to a historical average of 13.9%, giving a relative earnings growth of -5.0%.

The colour of each dot point indicates if equities outperformed their historical average over the following 3-year period. In all periods, the lower than average PE ratio and lower than average expectations resulted in outperformance in the next 3-year period – this is where we find markets heading into 2019.

As partners in your investment journey, it is important to us that we take the time to share key aspects of our approach and philosophy.

This article is part of our 2019 Economic and Investment Strategy Guide and one such starting point in our highly considered process that will ultimately manage downside risk and maintain the real value of capital.

For further reading of our 2019 Asset Class Assessments, please click one of the links below:

For more information on our approach to economic strategy or to obtain your own copy of our 2019 Economic & Investment Strategy Guide, please contact us on +613 9655 5000.

Speak to one of our advisers to learn more: david.clark@cameronharrison.com.au

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