- In 2018 global equities yielded negative returns (-8.2%). The euro area (EA) underperformed the US by 8pp mostly due to the Trump’s tax reform. Global growth peaked, geopolitical risks surged, with higher credit yields and inflation.
- Fed and ECB’s plans to reduce the monetary stimulus contributed to lower market multiples together with higher employment costs, a stronger USD in the US and a lower momentum in capacity utilization in the EA.
- For 2019 we see global growth moderating but remaining decent (3.4%) and expect low single-digit (below consensus) earnings growth. While core yields should marginally rise, increased corporate spreads and inflation will continue to put pressure on PEs which we forecast to remain below historical averages at 15X in the US and 12.5X in the EA.
- Short term, investors’ sentiment has deteriorated sharply, raising chances of a near-term rebound. That said, still not cheap valuation in the US, a slowdown in US growth and political risks should maintain total returns highly volatile in 2019 and only marginally positive thanks to dividend yields, the latter being higher for European indices and Japan.
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RETURNS DESPITE LOWER