Corporate earnings : Go East!
Nicolas Chaput, CEO and co-CIO at Oddo AM, and Laurent Denize, co-CIO at Oddo AM, think that Japan may be now the most attractive market.
Most companies have reported their first quarter 2015 results. On the whole, this reporting season went off rather well with nonetheless a few regional divergences worth mentioning.
Almost flat in the US compared to Q1 2014
In the US, while 19% of S&P 500 companies reported sales below forecasts (vs. 13% on average), 71% beat (albeit downgraded) forecasts, and while earnings were almost flat compared to the first quarter of 2014, this was due mostly to the drop in energy company earnings.
When removing this sector, earnings rose by about 7%, a gain that reflects share buybacks, which remained very heavy in the US. We are, however, more sceptical on US companies’ ability to continue buying back their shares at the current pace.
In Europe, the recovery is still on track and we remain optimistic
In Europe, results also exceed forecasts for 50% of the companies in the Stoxx 600, with, on the whole,
9% year-on-year growth (+11% ex-energy).
However, we feel that the crucial point is the consensus upgrades since April, by 6% in the case of earnings forecast for the MSCI EMU in 2015 and 2016.
The favourable impact of the economic recovery in Europe, the weaker euro and lower oil prices and interest rates are certainly major factors in these upgrades, which back our view that good surprises are possible in European corporate results over the coming months.
Japan : Recovery and affordably priced, the perfect combination
Japan may now be the most attractive developed market, for three reasons.
First, as in Europe and the US, corporate earnings are on a positive trend, with forecasts being revised upward. Forecasts for 2016, for example, are 13% higher than they were 18 months ago.
Second, valuations have not changed despite the improvement in earnings and are at low levels in absolute terms. The MSCI Japan is trading at 1.5 times book value, vs. 2.2 for the world on average and 2.7 times for the US.
Third, and perhaps most important, driven by pension funds, which, in accordance with the “wishes” of the Abe government, are investing massively in equities, governance is shifting towards better treatment of minority shareholders, with positive consequences to be expected in dividends and asset valuations.
The same phenomenon is being seen elsewhere in Asia, which is why we are overweighting this region and underweighting the Americas in particular.