Markets are moving from liquidity-driven to fundamentally driven meaning that this earnings season is going to be important for equity market performance throughout the remainder of the year, ING Investment Management International (ING IM) has predicted. Higher earnings growth is set to drive momentum but if this fails, it would likely dent investors’ patience and lead to profit taking, especially in light of future US budget discussions and tapering.
ING IM observes that the hurdle to pass is not very high in the US with analysts only expecting a 2.3% rise in earnings per share (EPS) relative to the third quarter of 2012. The investment manager believes this is too low as, over the quarter, economic surprise indices have been positive and on an improving trend. Furthermore, US companies benefitted from a weaker dollar.
In terms of currencies, the opposite is true for European companies while the volatility in emerging market currencies is not expected to help profits either. This is particularly pertinent to the expensive defensive consumer stocks – deriving a lot of their sales from emerging markets. However, for the overall earnings of the market, ING IM is not overly concerned given the broadening of the economic data strength towards the peripheral countries and more operational efficiencies.
Patrick Moonen, senior equity strategist at ING IM said: “We also expect the earnings momentum (upgrades minus downgrades), that has been negative for almost two years, to turn positive shortly. History shows that at turning points, analysts tend to be too optimistic or, in the current stage, too pessimistic. This bias may come from the fact that they prefer to wait for companies to adapt their outlook before adjusting their own earnings estimates.”
“Up until now, companies’ guidance has been muted at best. Of course, it may well be that companies refrained from upgrading their guidance due to the political uncertainty in the US. With this respect it is positive that a compromise on the debt-ceiling has been reached, however limited in time it seems to be.”
In terms of asset allocation, ING IM holds on to its growth oriented allocation stance with overweight positions in equities and commodities. Treasuries were scaled back to an underweight now that a compromise has been reached in US Congress.
Within fixed income products, ING IM prefers Euro assets with a relatively high risk premium compared to fundamental risk. Furthermore, the investment manager has brought most debt instruments that are sensitive to the US and emerging markets (like High Yield, Senior Bank Loans and Emerging Market Debt) back to neutral. Meanwhile, due to medium-term valuation headwinds impacting Euro Investment Grade credits and emerging market currencies, these are now underweight.
Moonen concludes: “Within equities, our cyclical sector allocation stance remains in place. Cyclical sectors such as industrials, consumer discretionary and IT remain overweight positions considering the improvement in housing markets, the US labour market and the expected increase in corporate spending. Elsewhere, the ‘stable growth’ sectors remain underweight as they are still too popular and expensive.”
“Regionally we prefer Japan and Europe. The former remains attractive due to policy making, earnings momentum and fund flows. For the latter, lower tail risks, better macro data, valuations, improved return momentum and still cautious investor positioning create an opportunity.”
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Source: ETFWorld – ING
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