Download our 2017 Midyear Outlook for an in-depth look at how economic momentum is building across the globe amid political uncertainty. Highlighted below are some of the key insights from our Midyear Outlook.
The U.S. recovery has inched along at a lackluster pace for more than seven years, largely due to consumer-related sectors of the economy. But the recovery is now broadening out with greater participation from business- and industrial-focused areas. While valuations are stretched in many areas of the market, there are still opportunities to own companies with strong top-line growth at reasonable prices.
Built to Go the Distance: U.S. Manufacturing, Capital Spending and Earnings Are All Strengthening
Threats to world trade and geopolitical stability are diminishing, which better positions international equities after years of falling behind those of the U.S. France’s May 7 presidential election, in which a populist, anti-European Union candidate was beaten by centrist, pro-trade leader Emmanuel Macron, was a referendum on the future of Europe. European equity valuations are appealing, especially compared with U.S. stocks. Meanwhile, leading companies in Europe and Japan have managed to succeed on a global basis as they go where the growth is. Shares of non-U.S. companies with significant exposure to the U.S. economy have done notably well. Select companies in Europe and Japan could get additional benefits if consumer spending and manufacturing activity picks up in their home markets.
The Divergence in Returns Shows That Investing in Companies Is Not the Same as Investing in Economies
Emerging market equities have surged nearly 50% since a trough in early 2016, thanks to stimulus in China, strong demand for a variety of commodities and a more stable U.S. dollar. But there could still be room for additional gains, especially in Brazil and China, which look like relative bargains compared with the U.S. In addition to the valuation advantage in emerging markets, corporate earnings in those regions are picking up too. Earnings for companies in emerging markets are expected to rise 21% in 2017. If that growth is achieved, it would be the best showing since 2010.
Emerging Markets Have Soared Since January 2016, but Valuations Remain Relatively Attractive
The U.S. Federal Reserve has been following through on its effort to move short-term interest rates higher. Brighter growth expectations in the U.S. and internationally have pushed yields higher as well. But yields are likely to remain in a relatively low range. Policy proposals to spur growth could be more modest and take longer to materialize than some market participants are expecting. Meanwhile, demand for bonds remains strong from global and U.S. investors as yields in other developed countries are much lower than what’s found domestically. Given the volatility in the equity market, bonds continue to offer important diversification for portfolios as well.
Read our 2017 Midyear Outlook to learn more about the challenges and opportunities ahead for investors in a brightening global economy.