Global Equity Markets Outlook for 2016 · Global Equity Markets Outlook for 2016 Timothy C. Murray,...
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Global Equity Markets Outlook for 2016 Timothy C. Murray, CFA, Global Capital Markets Analyst Kurt A. Umbarger, CFA, Global Equity Portfolio Specialist
Transcript of Global Equity Markets Outlook for 2016 · Global Equity Markets Outlook for 2016 Timothy C. Murray,...
Global Equity Markets Outlook for 2016
Timothy C. Murray, CFA,
Global Capital Markets Analyst
Kurt A. Umbarger, CFA, Global Equity
Portfolio Specialist
22
Volatility is back
Sources: FactSet, T. Rowe Price.
10
15
20
25
30
35
40
45
50
2009 2011 2013 2015
Inde
x Le
vel
CBOE MARKET VOLATILITY INDEXDecember 1990– December 2015
VIX2009 – 2011 AVG: 26.4 2012 – 2014 AVG: 15.8 2015 AVG: 17.6
1,850
1,900
1,950
2,000
2,050
2,100
2,150
Dec-14 Mar-15 Jun-15 Sep-15 Dec-15
S&P 500 INDEX2015 Prices
2016-US-18368
33
China: Credit binge and overcapacity leads to eroding business profits
100
120
140
160
180
200
30
35
40
45
50
Perc
ent o
f GD
P
Perc
ent o
f GD
P
CHINA CREDIT AND INVESTMENT2000 to 2014
Gross Fixed Capital Formation (L)
Debt of Private NonfinancialSectors (R)
Sources: Factset, Haver Analytics, T. Rowe Price
-90
-60
-30
0
30
60
90
120
150
-9
-6
-3
0
3
6
9
12
15
Year
ove
r Yea
r Cha
nge
(%)
Year
ove
r Yea
r Cha
nge
(%)
PRICES AND PROFITSJanuary 2011 to November 2015
PPI, All Industry Products (L)
Profits of Industrial Enterprises (R)
44
China: Shifting to a consumption economy
* "Old Economy" is defined as the secondary sectors, which are principally industrial-related sectors, of the Chinese economy. "New Economy" is defined as the tertiary sectors, which are the service-related sectors of the Chinese economy.
Sources: Deutsche Bank, National Bureau of Statistics
2.5
4.1
0.30%
2%
4%
6%
8%
10%
12%
2010 2011 2012 2013 2014
CHINA GDP GROWTHJanuary 2010 to September 2015
Overall GDP Growth
Old Economy*
New Economy*
Agricultural
-30%
-20%
-10%
0%
10%
20%
30%
40%
YEAR-OVER-YEAR CHINESE FIXED ASSET INVESTMENTSelect "New Economy" vs. "Old Economy" Sectors
Processing of Petroleum, Coking, Processing of Nuclear Fuel
Smelting and Pressing of Ferrous Metals
Manufacture of Pharmaceuticals
Manufacture of Computers, Communication and Other Electronic Equipments
55
Oil: Supply is well ahead of demand
Sources: Factset, OECD, Energy Information Agency, Baker Hughes, T. Rowe Price
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0
2,000
4,000
6,000
8,000
10,000
12,000
2000 2003 2006 2009 2012 2015
U.S. OIL PRODUCTION VS.U.S. OIL RIG COUNT
U.S. Crude Oil Field Production(Thousand Barrels Per Day)(L)
Rig Count (R)
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
0
20
40
60
80
100
120
140
160
2005 2008 2011 2014
Mill
ions
of B
arre
ls P
er D
ay
Oil
Pric
e ($
)
GLOBAL DEMAND MINUS SUPPLYVS. OIL PRICE (BRENT CRUDE)
Oil Price (L)
12 Month Average of DemandMinus Supply (R)
As of November 30, 2015
6
-6
-4
-2
0
2
4
6
8
10
2000 2002 2004 2006 2008 2010 2012 2014
GD
P G
row
th (%
)
GLOBAL GDP GROWTH2000 to 2015
As of December 2015
Sources: IMF and T. Rowe Price.
Slowing growth in emerging markets, muted growth in the U.S.
World
Avg. World GDP Growth
Emerging Markets
Developed Markets
Average '84 to '07:
3.3% Average '10 to '15:
2.1
-5
-3
-1
1
3
5
7
9
Rea
l GD
P G
row
th (Y
/Y %
Cha
nge)
U.S. REAL GDP GROWTH1984 to 3Q15
7
Sources: Deutsche Bank Research and Haver Analytics.
U.S. Economy: Sharp divergence between services and manufacturing
86%
32%
14%
68%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Share of U.S.Employment
Share of S&P 500Earnings
U.S. ECONOMY VS. S&P 500As of October 31, 2015
Manufacturing/Goods Producing Industries
Service Industries
30
35
40
45
50
55
60
65
Inde
x Le
vel (
grea
ter t
han
50 is
exp
ansi
on)
INSTITUTE FOR SUPPLY MANAGEMENT SURVEYS: PURCHASING MANAGER’S INDEXAs of December 31, 2015
Manufacturing Non-Manufacturing Composite
Service industries are: financials; multiline retail; specialty retail; Internet and catalogue retail; diversified consumer services; hotels, restaurants, and leisure; IT services; health care providers; and services.
88
Significant divergence regionallyAs of December 31, 2015
PERFORMANCE FOR MSCI REGIONSIn USD, Gross of Dividends
1 Year 3 Year 5 Year 10 YearMSCI World -0.3 10.2 8.2 5.6MSCI USA 1.3 15.0 12.5 7.4MSCI Europe -2.3 5.1 4.5 4.0
France 0.8 5.4 3.8 3.3Germany -1.3 5.6 5.2 6.1Italy 3.0 4.4 0.1 -2.1Spain -15.4 2.3 -0.1 2.5United Kingdom -7.5 1.9 3.5 3.1
MSCI Japan 9.9 10.4 4.6 1.1MSCI Emerging Markets -14.6 -6.4 -4.5 3.9MSCI Asia ex. Japan -8.9 -0.4 0.1 6.5
China -7.6 1.3 0.9 10.3India -6.1 3.8 -2.4 7.2
MSCI Emerging Europe Mid East & Africa -14.7 -16.2 -10.8 -3.1
Russia 5.0 -16.7 -11.9 -4.0Egypt -23.5 2.3 -3.5 1.5South Africa -25.1 -9.3 -5.3 3.6
MSCI Latin America -30.8 -19.1 -14.2 1.4Brazil -41.2 -24.6 -19.6 -0.5Mexico -14.2 -7.9 -2.4 4.8
MSCI Frontier Markets -14.1 5.2 0.7 -1.5
Annualized
Equities
9.4
6.85.6
3.92.5
0.7
-1.2-2.6
-6.2-8-6-4-202468
1012
Tota
l Ret
urn
(%)
PERFORMANCE DURING THE QUARTER
Past performance cannot guarantee future results.Sources: FactSet, MSCI.
99
Sources: Standard & Poor’s.
Significant dispersion at the sector levelAs of December 31, 2015
52%
32%31%
-21%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
2013
Q1
2013
Q2
2013
Q3
2013
Q4
2014
Q1
2014
Q2
2014
Q3
2014
Q4
2015
Q1
2015
Q2
2015
Q3
2015
Q4
(E)
2016
Q1
(E)
2016
Q2
(E)
2016
Q3
(E)
2016
Q4
(E)
Cum
ulat
ive
Gro
wth
in O
pera
ting
Earn
ings
Per
Sha
re
EARNINGS GROWTH BY SECTOR 2010 to 2016E
S&P 500 Health Care and Information Technology
S&P 500 Financials and Utilities
S&P 500 Consumer Discretionary and Consumer Staples
S&P 500 Energy, Industrials, and Materials
S&P 500Sector Annualized 5 Year Return
Cumulative 5 Year Revenue Growth
12 Months Forward P/E
Ratio
Health Care 20.28% 39.9% 16.0
Discretionary 17.83% 52.9% 18.1
Staples 14.50% 22.7% 19.9
Technology 13.95% 55.5% 16.0
Industrials 11.54% 25.7% 15.5
Financials 10.45% 5.9% 12.7
Utilities 11.03% -2.7% 15.4
Telecom 8.33% -3.7% 12.3
Materials 5.00% 13.0% 15.4
Energy -0.07% -9.9% 28.0
1010
*Years where performance was negative are not includedSources: Empirical Research Partners, FactSet, Standard & Poor’s.
Significant dispersion at the company level
-10%
0%
10%
20%
30%
40%
50%
Year
ove
r Yea
r Cha
nge
RETAIL SALES2006 to 2014
U.S. Retail Sales Growth
Wal-Mart Revenue Growth
Amazon.com Retail Segment Revenue Growth
-3%
34%
118%
134%
47%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Cum
ulat
ive
Perf
orm
ance
2015 PERFORMANCEPrice Return Only
S&P 500 ex. "FANG"
Amazon
Netflix
11
As at 31 December 2015
Sources: FactSet, Wilshire Atlas, MSCI/S&P GICS Sectors. Analysis by T. Rowe Price Associates, Inc.
REGIONS AND COUNTRIES—Valuations and Comparison To 2007 Peak
GLOBAL SECTORS—Valuations and Comparison To 2007 Peak
Regional and Sector Valuations
12
0
50
100
150
200
2007 2008 2009 2010 2011 2012 2013 2014 2015
Emerging MarketsLatin AmericaEmerging AsiaEmerging Europe & Middle East
As at 31 December 2015
Sources: FactSet, Citi Research, MSCI.
A Disparate Global Earnings Recovery
REGIONAL EM PROFITS (EPS) Since Last Cycle Peak (October 2007)
-40
-20
0
20
40
60
80
100
120
140
2007 2008 2009 2010 2011 2012 2013 2014 2015
REGIONAL PROFITS (EPS)Since Last Cycle Peak (October 2007)
Emerging Markets Europe ex UKJapan United KingdomUnited States Canada
13
As at 31 December 2015
Sources: FactSet
The Big Earnings Miss
-25%
-20%
-15%
-10%
-5%
0%
5%
2015E CONSENSUS EPS FORECAST CHANGE SINCE SEPTEMBER 2014
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
Hea
lth C
are
Util
ities IT
Tele
com
s
Con
s D
isc
Fina
ncia
ls
Con
s S
tapl
es
Indu
stria
ls
Mat
eria
ls
Ene
rgy
2015E CONSENSUS EPS FORECAST CHANGE SINCE SEPTEMBER 2014
1414
U.S.: Energy and Currency Impact on Operating Earnings Expected to DissipateAs of January 12, 2016
Sources: Standard & Poor’s and RBC Capital Markets.Past performance is not a reliable indicator of future performance.
Energy and the dollar are weighing on 2015 earnings expectations
These impacts are expected to reverse in 2016
-20
-10
0
10
20
30
40
50
60
70
80
2008
Q1
2008
Q2
2008
Q3
2008
Q4
2009
Q1
2009
Q2
2009
Q3
2009
Q4
2010
Q1
2010
Q2
2010
Q3
2010
Q4
2011
Q1
2011
Q2
2011
Q3
2011
Q4
2012
Q1
2012
Q2
2012
Q3
2012
Q4
2013
Q1
2013
Q2
2013
Q3
2013
Q4
2014
Q1
2014
Q2
2014
Q3
2014
Q4
2015
Q1
2015
Q2
2015
Q3
(E)
2015
Q4
(E)
2016
Q1
(E)
2016
Q2
(E)
2016
Q3
(E)
2016
Q4
(E)
Ope
ratin
g Ea
rnin
gs p
er S
hare
S&P 500 Operating Earnings per Share by SectorJanuary 2008–December 2016 (E)
S&P 500 Health Care, Information TechnologyS&P 500 Financials, Telecom. Services, UtilitiesS&P 500 Energy, Industrials, MaterialsS&P 500 Consumer Discretionary, Consumer StaplesS&P 500
Note: Bottom-up consensus expectations; YoY growth of current constituents
Note: Bottom-up consensus expectations; YoY growth of current constituents
$
15
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
05 06 07 08 09 10 11 12 13 14 15
WorldUSAEuropeJapanEmerging Markets
As at 31 December 2015
Source: Factset
M&A Booming, Cash Still Rising
GLOBAL M&A ANNOUNCEMENTSTRANSACTION VALUE QUARTERLY ($MM)
CASH ON BALANCE SHEETS ($MM)Aggregate of all companies in MSCI Index, January 2005 to December 2015
90 92 94 96 98 00 02 04 06 08 10 12 14$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
1616
*Data based on financial statements released as of 9/30/15, based on data period ending 6/30/15.Sources: Citi Research, FactSet, and Deutsche Bank U.S. Equity Strategy.Past performance is not a reliable indicator of future performance.
U.S.: Net Negative Share Issuance Partially Offset Impact of Weak Energy and Currency
-600
-400
-200
0
200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
U.S
. $, B
illio
nsS&P 500 NET NEW SHARE ISSUANCEJanuary 2000–December 2015*
0
280
560
840
1,120
1,400
0
50
100
150
200
250
300
Num
ber of Deals
U.S
. $, B
illio
ns
Value of Deals (L)Number of Deals (R)
NUMBER AND VALUE OF U.S. M&A DEALSDecember 2000–December 2015
0
100
200
300
400
500
600
700
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
U.S
. $, B
illio
ns
S&P 500 BUYBACK ANNOUNCEMENTSRolling 12-Month total, December 1996–December 2015
1717
Sources: Standard & Poor’s, FactSet.
U.S.: Capex levels have fallen, except in energy, materials, and utilities sectors
Equities
414%
131%
153%143%
169%
122%110%
121%
155% 150%
70%
98%
130%
58%
126%
100% 102%
125%
204% 204%
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%S&P 500 CAPEX AS PERCENT OF DEPRECIATION
Calendar Year Average, 1990-2007
Calendar Year Average, 2010-2014
As of December 18, 2015
1818
As at 31 December 2015
Sources: Factset, MSCI.
Europe: Analysts’ expectations are optimistic and holding up well in 2015
Analysts expect European earnings to grow faster than U.S. earnings during 2015 to 2017.
However, expectations for growth have proven unfounded in each of the previous three calendar years. Will this time be different? Thus far the answer is yes.
6.34%
9.76%
22.24%
9.78%
24.84% 24.80%
0%
5%
10%
15%
20%
25%
30%
Revenue Margins* Earnings Per Share
ANALYSTS ESTIMATES OF CUMULATIVE 3 YEAR GROWTH2015 to 2017
S&P 500MSCI Europe ex UK
80
85
90
95
100
Estim
ates
vs.
Sta
rt o
f Yea
r (In
dex
= 10
0)
MSCI EUROZONE: PATH OF CALENDAR YEAR EPS ESTIMATES2012 to 2015
2012 2013 2014 2015
19
Sources: MSCI and FactSet.1Data exclude financials and utilities. Share buybacks are net of share issuance.Past performance is not a reliable indicator of future performance.
Japan: Corporate Governance Is Improving, and Interesting Opportunities Remain
-2
0
2
4
6
8
10
12
14
16
18
20
22
Ret
urn
on E
quity
(%)
RETURN ON EQUITYJanuary 1997–December 2015, MSCI Indices
Europe Emerging Markets
Japan USA
Corporate behavior has changed amid increased focus on raising corporate value. More efficient use of cash, share buybacks, and acquisitions have been on the rise. Return on equity has benefited from these actions as well as from a cheaper yen abroad.
-40
-20
0
20
40
60
80
100
120
140
160
Aug 92–Aug 94
Jun 99–Apr 01
Jun 02–Jul 04
Jul 09–Aug 10
Aug 12–Aug 14
Sep 14–Aug 15
%
JAPANESE CORPORATES USE OF INCREMENTAL FREE CASH FLOW WHEN RISING1
1992–August 2015
Net New DividendsNet New Share BuybacksNet New Retained Cash
2020
Asia ex-Japan OutlookAs at 31 December 2015
Sources: FactSet and International Monetary Fund (IMF).
RESOURCE STOCKS AS A PERCENTAGE OF MARKET CAPITALIZATION
CURRENT ACCOUNT BALANCE AS A PERCENTAGE OF GDP
ASIA IS A BENEFICIARY OF LOWER RESOURCE PRICES
0%
5%
10%
15%
20%
25%
30%
Asia ex Japan EM LatinAmerica
EM EMEA
% o
f Ind
ex
Energy Materials Resources3.0
2.21.3
-2.6-3.3
-9.6
-12
-10
-8
-6
-4
-2
0
2
4
% o
f GD
P
Current account balance as %GDP
21
China’s Credit Problem
Source: Bank of International Settlements, Haver Analytics, T. Rowe Price.
As at 30 June 2015
-50
0
50
100
150
200
250
Priv
ate
Non
-Fin
anci
al C
redi
t as
% o
f GD
P
PRIVATE NON-FINANCIAL CREDIT
Current Change since 2007
2222
China Has A Debt ProblemAs at 30 June 2015
Source: Morgan Stanley.
CHINA DEBT TO GDP BREAKDOWN
21% 22% 21% 19% 18% 19% 19% 20%15% 23% 23% 22% 22% 23% 26% 27%
77%83% 83% 82% 98% 106% 111% 119%
34%43% 57% 59%
58%57%
58%58%
12%
16%19% 19%
20%22%
24%26%
0%
50%
100%
150%
200%
250%
300%
2008 2009 2010 2011 2012 2013 2014 Jun-15
Central government Local governments Mid/large corporates Small business Consumers
2323
China: Can a hard landing be avoided?
Sources: Factset, Haver Analytics, T. Rowe Price
0
50
100
150
200
250
Gro
ss D
ebts
as
% o
f GD
P
CHINA EXTERNAL VS. INTERNAL DEBT2003 to 2014
External debt in foreign currencyNon-financial sector domestic debt
The vast majority of Chinese debt is held within China. This means there is less chance of contagion and the government has more control if it decides intervention in credit markets is necessary.
Policymakers are motivated to maintain healthy growth rates and have the tools to do so, buoyed by huge cash reserves and the ability to manipulate interest rates and reserve requirements.
$1.87 Trillion
$3.79 Trillion $3.53
Trillion
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Total CentralGovernment
Budget Surplus,2012 to 2014
Current Holdingsof U.S. Treasury
Securities
Current ForeignReserves
Excluding GoldB
illio
ns o
f US
Dol
lars
CHINESE CENTRAL GOVERNMENT ASSETSAs of October 2015
24
Currency: A Case-by-Case StoryAs of September 30, 2015
DEVELOPED MARKET CURRENCIESBase 100 = Dec. 31, 2014 Spot vs. USD
Past performance is not a reliable indicator of future performance. Sources: Reuters, J.P. Morgan, and T. Rowe Price.
80
85
90
95
100
105
Dec
-14
Jan-
15
Feb-
15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
EuroJapanese YenCanadian Dollar
40
50
60
70
80
90
100
110
120
2011 2012 2013 2014 2015
Inde
x of
Per
form
ance
vs.
USD
(100
= 5
Yea
rs A
go)
YUAN DEVALUATION: OVERDUE?5 Years Ending January 8, 2016
Chinese Yuan Russian RoubleJapanese Yen EuroBrazilian Real Indian Rupee
2525
Supply/Demand Fundamentals Suggest Oil Price Could Approach Cash Costs
Source: Bernstein Research, National Stripper Well Association, HIS, MEG Energy, Canadian Natural Resources, Suncor, Concho, Matador Resources, T. Rowe Price
$25
$30
$25
$45
$25
$33$31 $31
$35
$40$38
$44
$40
$43
$20
$25
$30
$35
$40
$45
$50
$55
$60
Cash Cost Cash Cost + Maint Capex
Oil Sands Upgraded US Shale Deepwater Stripper Wells
Oil Sands Wgt. Avg. Oil Sands SAGD Oil Sands Mining
*as of 3Q15 Costs/FX/Oil Price, assumes no further deflation
2626
Energy Bankruptcy Surge Looms
Source: Empirical Research, The U.S. Energy Information Administration and T. Rowe Price
Real debt divided by trailing twelve month US oil, NGL, and natural gas production
0
10
20
30
40
50
60
70
80
90
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Real Debt ($B)/TTM US Production
2015
January 1, 1952 through July 1, 2015
2727
Conclusion: Keep Return Expectations Moderate
U.S. economy on relatively solid ground, rest of the world at different stages of economic cycle.
Expect greater volatility in the equity markets, which will create new set of opportunities. Fair valuations and already-high profit margins limit the upside.
Earnings will ultimately dictate equity market direction and there is room for positive surprises as energy prices and currencies stabilize.
Emerging market stocks relatively cheap—though opportunities are country- and company-specific.
Focus on disruptive business models attacking huge profit pools.
Fundamental analysis and active management more important than ever.
Expect Heightened Volatility Amidst Greater Divergences
Important InformationThis material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.The views contained herein are as of January 2016 and may have changed since then.Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.All investments are subject to market risk, including the potential loss of principal. Non-U.S. securities are subject to the unique risks of international investing, including currency fluctuation.All charts and tables are shown for illustrative purposes only.T. Rowe Price Investment Services, Inc., distributor.
