“The worst of the earnings recession appears to be behind us, and fund managers still hold excessive levels of cash. The latter suggests they are already prepared for weakness, which could limit the size of any short-term pullback,” the firm said in a research note, when addressing its view on the outlook for global equity markets.
However, rising uncertainties also signal a need for investors to adapt a more selective approach within equities. Narrowing margins for US companies, the prospect of higher US interest rates and volatile commodity prices are equity market concerns.
“We remain cautiously positive on US equities, noting the S&P 500 broke through key resistance in early June. While it has since retraced, it is still in a higher trading range and sentiment has started to improve. Besides moderating expectations for the pace of Fed rate hikes, a key fundamental factor that has supported the market centres around the potential for a return to rising corporate earnings in [the third quarter].”
The US energy sector outlook has improved, the firm added. “Upside could come from an end to impairments and further increases to consensus earnings as analysts update their forecasts to reflect rising oil prices.”
European area equities are not expected to outperform in the near term as the market prices in the global repercussions of the Brexit vote.
“A key theme within euro area equity markets is the performance of defensive sectors relative to cyclicals, which we believe will be a key focus going forward. In particular, the positive performance of the consumer staples sector stands in contrast to the negative performance of the consumer discretionary sector.”
Asian equities have a lower preference than Europe and the US. “Interest rates have been cut in Korea, Taiwan and Indonesia over the past month, reflecting the confidence among policymakers in pursuing a path independent of the Fed. Such a strategy is only possible due to improving fundamentals, including low inflation.”
Within Asia, India continues to rank as the firm’s most preferred market. “We believe that continuing structural reforms leading to lower inflation and an improvement in fiscal policy reduces risk at a time of rising uncertainty globally.”
The S&P 500 has been outperforming the MSCI Asia and MSCI Europe indices over the past three years, but will it continue?