Finding value in international equity markets in 2015

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Edmond de Rothschild Asset Management advises capitalisation on disparities in international equity markets.

US growth, the oil counter shock and prevalent investor scepticism are three very good reasons for equity markets to advance in 2015, especially as international equity markets have not yet fully discounted elements like non-materialisation of the expected rate hike in 2014 and a collapse in commodity prices.

Last year’s double-digit advance in international equity markets (almost +20% in EUR with the currency effect accounting for half of that) and the rally in early 2015 have, however, masked numerous disparities which need to be closely watched.

Focusing on a value strategy helps capitalise on these disparities.

The global economic recovery is driving international equity markets

The US economy really stood out from the pack in 2014. The S&P500 gained 28 % in EUR3 on strong economic growth and upbeat company earnings. Ongoing moves to increase wages in the US should underpin growth there in 2015.

Household spending has picked up and the fall in average indebtedness could justify expectations of a property recovery. Cash flow has never been as abundant and funding rarely as accessible; as a result, US company earnings now represent more than 10 % of GDP, an absolute record.

They now have large cash piles which could be rechannelled into investments and acquisitions/restructuring or returned to shareholders.

Europe in 2015 will be driven by the knock-on effect from the US recovery, especially in the second half of the year, and by the European Central Bank’s quantitative easing programme. The QE launch has coincided with tangible signs of a recovery both in European surveys and economic statistics.

Moreover, this has occurred after several months of downgrades which left expectations very low. One of this year’s pleasant surprises might be an increase in European company sales as spending recovers. European earnings have considerable rebound potential amid an economic recovery.

Corporate margins are somewhat compressed and have genuine potential to expand. Interest rates are in free fall, providing companies with very favourable funding conditions while retreating commodity prices are helping margins to rise.

Company competitiveness is also improving due to the euro’s fall against the US dollar.

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