By David Eiswert
Despite intense scepticism throughout the period, equity investors have enjoyed some of the best returns in a generation over the last five years. With a panicked initial starting point, and primed by huge amounts of monetary stimulus and historic lows in interest rate levels, world stock markets have posted large gains.
After the false dawn of 2011, we are now witnessing definite signs that the global economy has turned a corner. While concerns surrounding growth momentum will remain a feature of markets, we believe the next few years will evidence a continuation of positive fundamental trends.
While the US economic recovery has been somewhat anaemic so far, this is not unusual after a severe economic and financial crisis. Looking forward, we expect the US economy will maintain its positive trend through 2014, in part as the government’s fiscal tightening efforts begin to abate.
We do not believe that the long-term case for EM investing is broken, but it is certainly going through a meaningful period of change, which is important to understand in the context of emerging and developed world investing. We maintain a belief that many EM stocks retain sensitivity towards a recovery in global growth. Given this, we are becoming more optimistic on a bottom-up basis that we will see a trough in many stocks in the coming quarters. We have therefore been carefully and very slowly adding to selective stocks where we believe fundamentals have disconnected with valuations. These include Walmart de Mexico and Chinese web giant Baidu.
While history suggests markets may take a breather following the magnitude of returns we have seen since early 2012, this should not be confused with the end of the equity market cycle. Cycles tend to come to an end when complacency creates bubbles and/or when valuations become excessive. While the end of a cycle can always be catalysed by event-specific crises, we do not see broad-based signs of stretched valuations or asset bubbles.
Looking forward, it will be important to stay engaged as we enter a likely period of improvement for the global economy and corporate profits growth. Having seen multiple expansion drive a large amount of equity returns in recent quarters, it is important to recognise the future drivers of equity markets are likely to evolve. A more even balance of returns spread across earnings growth, capital allocation, and multiple expansion will make for a more complex environment. However, this outlook will also favour those who can identify companies with accelerating fundamentals.
David Eiswert is the manager of the T. Rowe Price Global Focused Growth Equity Fund
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