Editor’s Note: The full version of this article was originally published in April for subscribers of Capitalist Times Premium. And the analysis still merits investors’ attention—the stock highlighted is up 17 percent. We continue to track this and other global stocks, most recently through the latest Global Top Cat piece, Europe: Things are Good. If you aren’t a Capitalist Times Premium subscriber, it’s not too late. Subscribe today!
Four months into the year and the global economy is in the midst of synchronized growth that should allow it to grow around 3.5 percent this year. China’s solid growth, India’s recovery after the monetarization jitters and the eurozone’s stronger-than-expected growth have been the catalysts for the strong showing this year.
Germany is Europe’s economic engine. Its economic growth should remain on a solid trajectory, and the rest of the Europe will most probably follow. As the chart below indicates the Ifo Business Climate Index increased by 0.6 points to 112.9 in April. The index now stands at its highest level since July 2011.
European economic activity indicators point higher as well, with the Eurozone Composite PMI reaching a six-year high this month. Politics aside, such a trajectory suggests GDP growth will be closer to two percent this year and certainly higher than last year’s 1.7 percent.
Global economic activity should start to converge to the survey data, which has been very upbeat. Furthermore, the recovery in emerging markets seems to be broadening in scope. Big countries like Russia and Brazil are expected to experience positive GDP growth this year after 2016’s disappointing slowdown.
The dictum “Sell in May and go away” is well known. And when it comes to Asia, it’s valid advice. For the past decade, Asia has registered negative returns around 70 percent of these times, and the average drop has been 4 to 5 percent.
Asian shares have also become pricier. For example, Asia ex Japan trades at around 1.63 times book value, close to the 1.69-1.77 mark that’s been the highs during the past five years.
Nevertheless, the fundamentals have been improving. Asia ex Japan enjoys a return on equity of 10.3 percent. That’s the best in six years. For this same measure, Chinese Hong Kong-listed shares, India, S. Korea and Indonesia are also all strong. Plus, the region’s expected growth for earnings per share (EPS) has risen another 0.5 percent, now standing at 18 percent for the year.
A cursory look at fund flows indicates that investors outside of Asia are seeing the region’s–and emerging markets in general–potential for outperformance. Just in the last couple of weeks, emerging market funds and Asia-dedicated funds recorded net inflows of $2.5 billion and $1 billion, respectively.
Emerging market funds have seen cumulative inflows of $21 billion this year. Net inflows, currently at $16.4 billion, are on track to beat last year’s amount of $20.4 billion.
Experienced investors know that calling tactical corrections is extremely difficult. Furthermore, geopolitical, political and trade war risks remain. Negative developments on these fronts may alter the economic and market picture we envisage. That said, dips, especially in Asia, should be bought.
Financial stocks are the best way to profit from the eurozone’s potential upside. European banks, in particular, are currently experiencing positive earnings and dividend momentum. This latter dynamic is the strongest it’s been in eight years.
The ECB should make its first rate hike sometime next year. This increase will be the final catalyst for better bank earnings and commence a new cycle of higher earnings expectations by the market.
As noted in Europe: Enter France, French, Spanish and Italian banks are the most geared to benefit from rate normalization in Europe.
Yiannis G. Mostrous contributes his expertise in emerging markets and international equities to Capitalist Times in his Global Top Cat columns.