Asia, emerging markets, cyclicals top global equity call by SEB

SEB believes there is good long term opportunity in equities, particular in Asia, emerging markets and cyclicals, for those who are prepared not to be put off by ongoing uncertainty about factors such as the downside risk to global economic growth.

The world still looks uncertain at the moment, with concerns over macroeconomic figures, debt problems in Europe and the US, and the pace of China’s recovery. But it is precisely because stock markets are undervalued against the longer term prospects that it is a good time to consider equities, SEB said in a note on global equities that forms part of its latest Investment Outlook.

“The third quarter company reporting season was mixed. Generally speaking, sales figures were weak for the world’s listed companies while earnings came in as expected. Fourth quarter company forecasts were cautious, tilted in a negative direction, leading to downward revisions of earnings estimates. On a global basis, corporate earnings are expected to grow by 12% in 2013, with the outlook for emerging markets somewhat higher at 13.5%. American earnings estimates stand at 10% expected growth, while European estimates are a bit higher (115).”

“Asia and emerging markets are at the top, with Korea, Taiwan, Indonesia and Thailand among markets where earnings are expected to increase by 15-25% next year. Valuations must be viewed as attractive, with global equities trading at price-earnings (P/E) ratios of 12x expected 2013 earnings. The US pulls up the figure with a P/E ratio of 12.6x, while Europe is trading at 11x and Japan 11.5x next year’s projected earnings. Equities in emerging markets stand out as the cheapest, with a P/E ratio of 10x.”

SEB said that cyclical sectors will have better earnings growth than the average next year, with companies in the commodities, technology and financial sectors growing fastest. In contrast, companies in the durable goods sector will see earnings fall.

Asia, and China in particular remains in focus of global equity investors. In part this is because the gap between valuations of US versus Chinese equity has widened.
China’s P/E ratio for 2013 is forecast as 9.5x, with earnings growth of 10%.

“Aside from China, we also have a positive view of less-developed countries in Asia with major growth potential, such as Indonesia, Malaysia and Thailand. Russia and Eastern (including Central) Europe are also attractive investment alternatives; given their low valuations and high earnings growth, shares from these regions should be part of a global equity portfolio,” SEB said.

 

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Jonathan Boyd
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