Investors keep faith with emerging markets – 3066

12th October 2010

According to Schroders' latest global market overview, which covers performance over the last three months and looks ahead to near-term prospects, analysts have continued to revise down their earnings expectations on the US.

As a result, Wall Street stocks are receiving more downward revisions to future earnings than upgrades. Of the S&P 500 companies, more than a half have experienced a reduction in their earnings estimate for the next 12 months.

Schroders itself has downgraded its view on US equities to moderately underweight to reflect its lower growth forecast for the American economy, noting that while there are signs of improvement in US consumer spending, housing activity remains in the doldrums.

US households are continuing to de-lever, it says, with the US savings rate hitting the highest level for more than a decade.

On a positive note, however, the US corporate sector is generally maintaining strong cash balances.

Troubling times for US & Japan 

While the US threatened by a double-dip, as reported by the Daily Telegraph, and US Federal Reserve seriously considering further quantitative easing (QE), Japan is continuing to fight its own battles against deflation and slowing economy. Last week it embarked on a fresh round of QE, as reported by the BBC and MindfulMoney.

With the economic news emerging out of Japan over the last few months disappointing, analysts have been busy revising down its growth outlook.  

The fresh bout of QE may yet help equities, with any subsequent weakening of the yen helping to provide support for struggling Japanese exporters, who play a critical role in the performance of the market.

For the time being though, global investors are cooling on Japan equities, with Schroders noting that even the price momentum behind its MSCI total return stock index weakest among all regions.  

It is therefore maintaining an underweight position on Japan.

UK budget cuts welcomed

Turning to the UK, Schroders notes that despite attractive valuations for London equities, forecasters are expecting growth in the UK (along with the Eurozone) to be the weakest relative to the rest of the world.

Although both economies are likely to benefit from a weaker currency, fiscal consolidation over the coming year could constrain their growth prospects.

However, UK's budgetary measures to cut the deficit, covered by the Daily Mail, have reassured the market to some extent when compared to their European neighbours.

Looking ahead, Schroders expects that concerns over the sovereign solvency of the peripheral European economies like Ireland, Portugal and Spain to increase later in the year, and be a drag on performance.

A further, important and positive point to note about London equities is that FTSE 100 companies are also less geared towards the domestic picture and are well placed to benefit from overseas growth and earnings.

Foreign income represents 59% of total FTSE 100 income versus 35% in the Euro Stoxx 50 companies. Overall, Schroders is positive on the UK, but has underweight positions in Europe ex UK.

Investors stay focused on emerging market strength

In contrast to the patchy, generally downbeat prospects across Japan, Europe, UK and US, Schroders continues to believe that the best sustainable growth prospects remain in the emerging countries due to their stronger structural fundamentals including current account surplus positions.

It expects the emerging world to account for more than half of global growth this year and next.

China, of course, is one of the key contributors to emerging growth and its economy is forecast to expand by 10% and 8.8% respectively in 2010 and 2011.

On a further positive note, inflation indicators in China have started to turn down, suggesting prices have peaked in the region.

Not surprising then that the emerging world is one of Schroders favourite markets and that it has an overweight stance on it.

More broadly, both momentum and investors' sentiment towards the region has turned more positive compared to three months ago, it says.

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