global equity outlook

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GLOBAL EQUITY OUTLOOK Summer 2017

Politics and Earnings Growth The Trump Trade has given way to the Trump tirade. Instead of getting legislative reform in the last few months, we are mired in investigations, leaks and (of course) tweets. Indeed, the optimism that erupted among investors and businesses following the November election is being tested, creating a gap between “soft data” (sentiment) and “hard data” (corporate investment). That gap matters when you consider that the S&P 500 is in the ninth year of a bull market, one of the longest on record. Price-to-earnings (P/E) ratios for many benchmarks also are near the top of their historical ranges, making it difficult to find inexpensive stocks. Despite these negatives, stocks globally continue to rally. Businesses are also showing signs of strength. During the first quarter, more companies in the S&P 500 beat their earnings estimates than missed. That is important since we believe profits, not multiple expansion, will be a key driver of equity performance going forward. Markets could get another boost if and when President Donald Trump’s ambitious agenda is realized. Lower regulation, tax reform and infrastructure spending – while far from implementation – would increase confidence and fuel corporate spending, driving earnings growth and market returns. In Europe, politics and policymakers are also never far from view. So far, though, election outcomes have generally been investorfriendly. In France, pro-European Union candidate Emmanuel Macron handily won the presidential election, putting to rest fears about the demise of the euro and European financial system. The UK general election in June – in which Prime Minister Theresa May’s Conservative Party lost its parliamentary majority – added to uncertainties about Brexit negotiations. Even so, equity markets did not react negatively to the election’s outcome. On the contrary, the London stock market rallied as the country’s currency, the sterling, weakened, helping UK exporters.

Global Equity Outlook Summer 2017

Expectations for European economic growth are increasing and the region trades at a larger-than-normal discount to the U.S. Europe must figure out how its central bank can extract itself from the economy. European Central Bank actions have pushed sovereign rates down to remarkably – and likely unsustainably – low levels. The central bank intervention in the U.S. also has been powerful, but the Federal Reserve (Fed) signaled an easing process some time ago and has a stronger economy as a backdrop. Neither bank faces an easy path, but we think the challenge in Europe leaves that region as a higher-risk and, therefore, higher-return investment than U.S. equities. Meanwhile, China’s highly visible hand of intervention has stabilized the country’s economy. Consumer spending has improved, foreign-exchange reserves are leveling off and the outflow of capital has eased. A stable and growing China is important for global growth and, of course, for global confidence. A discussion of investor confidence naturally brings us back to Trump and to global politics overall. Although companies may delay spending as they await clarity on regulations and tax policy, competitive pressures could eventually force firms to loosen their purse strings. Industry consolidation, for example, often leads to more deals as businesses try to defend market share. Capacity expansion, too, can prompt companies to invest. Still, not all firms will be able to flex their competitive muscles equally, which should help companies differentiate their business models and growth profiles. With equity correlations already falling, active investors may increasingly find attractive opportunities. Indeed, while the Trump Trade was about sectors, the trade ahead, we think, will be about individual stocks.

2

Current Global Market Conditions

Growth Outperforms: Growth stocks start to shine as earnings improve

The Case for Active: Lower asset correlations are potentially leading to new investment opportunities

Market Strength: Gains are not overly concentrated in select stocks

Global Equity Outlook Summer 2017

3

A Growth Market •

The Trump Trade appears to be over, but we believe U.S. stocks are poised for further gains

•

Investors now favor growth-oriented stocks over cyclical sectors, which rallied after the 2016 U.S. presidential election

•

While the Fed continues with rate hikes, yields on long-term bonds have not risen materially, which is positive for equities

THE WAY FORWARD: We believe growth continues to outperform value in 2017. U.S. Treasury Yields

Growth Stocks Rebound

Although the Fed has raised short-term rates, long-term yields are falling

Year to Date

25%

Yield Change

5/31/2017

12/31/2016

3.5%

40

20%

35 30 25

2.5%

15% Yield

Total Return

3.0%

10%

20

2.0%

15 10

1.5%

5

1.0%

5%

0 -5

0.5%

Global Equity Outlook Summer 2017

30 Year

20 Year

5 Year

-15 10 Year

Source: Bloomberg. Data as of 5/31/2017 Note: Health care, technology and financials performance are sector returns for the S&P 500 Index. Post U.S. election time period is 11/9/2016-12/31/2016.

0.0% 3 Year

Russell 1000 Russell 1000 Value Index Growth Index

1 Year

Financials

6 Month

Technology

3 Month

Health Care

-10 1 Month

0%

Yield Change (bps)

2016 (Post U.S. Election)

Source: Bloomberg. Data as of 12/31/2016 and 5/31/2017

4

The Outlook for Earnings Improves •

Earnings are improving, thanks to a stronger global economy

•

We believe company fundamentals will drive future profit growth, rather than financial engineering

•

Earnings, as a result, will likely be a key driver of stock returns

THE WAY FORWARD: Find firms with strong business models that can deliver organic growth. Earnings Per Share (EPS) by Index S&P 500 Index

MSCI Emerging Markets (EM) Index

MSCI World ex-USA Index

MSCI EAFE Index

$180 $160 $140 $120 $100 $80 $60 $40 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017 (Est.)

2018 (Est.)

Source: Bloomberg Note: Data reflect annual EPS and are indexed to 100 as of 12/31/2007.

Global Equity Outlook Summer 2017

5

Differentiated Returns •

Correlations globally have come down, creating more opportunities for stock selection

•

Certain risk factors that weighed on equity returns in recent years, such as volatility, have started to level off

THE WAY FORWARD: The case for active management strengthens. Returns by Risk Factor

Falling Stock Correlations High

Avg.

May 31

Volatility and financial leverage have been negative contributors to stock returns

Low

0.9

Momentum

0.8

Value Investing

Financial Leverage

Volatility

180

0.7

160

0.6

140 120

0.4

100

0.3

80

0.2

60

0.1

Source: Bloomberg. Data as of 5/31/2017 Note: Data are three-month correlations for the past three years.

Global Equity Outlook Summer 2017

Apr-17

Apr-16

Apr-15

Apr-14

Apr-13

Apr-12

FTSE 100 Index

Apr-11

MSCI Euro Index

Apr-10

S&P 500 Index

Apr-09

Dow Jones Industrial Average

Apr-08

40

0.0

Apr-07

Correlation

0.5

Source: Bloomberg. Data as of 4/28/2017 Note: Returns reflect Barra risk factors and are indexed to 100 as of 12/31/2002.

6

A Broad Rally •

Market gains are not as narrow as they might seem

•

A return to an even broader market rally would benefit active investing

THE WAY FORWARD: Don’t chase momentum. Market capitalization-weighted indices can lead to overconcentration. S&P 500 Index Advance/Decline Line The upward slope in the advance/decline line suggests a healthy market

S&P 500 Stock Returns Market performance is not overly concentrated S&P 500 Index Total Return

5%

44%

2012

2013

2014

2015

2016

Source: Bloomberg, Janus Henderson. Data as of 5/31/2017

Global Equity Outlook Summer 2017

YTD

0%

0 3/31/17

46%

Advancing

3/31/16

10%

Declining

3/31/15

48%

10,000

3/31/14

15%

3/29/13

50%

20,000

3/30/12

20%

3/31/11

52%

30,000

3/31/10

25%

3/31/09

54%

40,000

3/31/08

30%

3/30/07

56%

50,000

12/30/05 3/31/06

35% Advance/Decline Line

58%

Index Total Return

% with Returns > Avg.

% of Stocks with Above-Average Returns

Source: Bloomberg. Data as of 3/31/2017 Note: Figures are for Bloomberg Cumulative Advance/Decline Line for the S&P 500 Index. The Advance/Decline Line is a market indicator that measures the number of advancing stocks minus the number of declining stocks.

7

Global Market Concerns

The Bull Market Ages: A long market rally leads to new potential risks, such as rising equity valuations and increased volatility

Mind the Gap: Economic data lag sentiment

Monetary Tightening: What happens as central banks reduce stimulus?

Global Equity Outlook Summer 2017

8

An Aging Bull Market •

The bull market is aging and on the verge of becoming one of the longest on record

•

But the economic recovery since the Great Recession has been shallower than normal, providing room for earnings to expand

•

Stocks continue to shrug off market shocks and many known risk events (e.g., the French presidential election) are behind us

THE WAY FORWARD: We think a strengthening global economy and healthier corporate profits could extend the bull market. Index Performance 1980-2016 Today's U.S. stock rally is one of the longest in recent history

Average Earnings Growth In many cases, recent earnings growth has lagged long-term averages MSCI World Index

S&P 500 Index

Russell 1000 Index

MSCI World Index

Years with Positive Returns

31

29

28

Years with Negative Returns

6

8

9

Avg. Return (Up Years)

17.9%

17.4%

17.9%

Avg. Return (Down Years)

-14.6%

-12.3%

-14.1%

Current Bull Market Length

8 Yrs

8 Yrs

1 Yr

Longest Streak of Positive Returns

9 Yrs

8 Yrs

8 Yrs

Longest Streak of Negative Returns

3 Yrs

3 Yrs

3 Yrs

Global Equity Outlook Summer 2017

S&P 500 Index

5-Year

10-Year

20-Year

-1% Source: Bloomberg, Janus Henderson Note: Data reflect calendar years.

Russell 1000 Index

0%

1%

2%

3%

4%

5%

6%

Annual EPS Growth Source: Bloomberg. Data as of 12/31/2016

9

Exuberance and Disruption •

Housing and other real estate prices are spiking, and consumers are taking on more credit

•

Technology is also disrupting business models across many industries, creating winners and losers

THE WAY FORWARD: Keep watch for a deterioration in consumer finances and look for innovative businesses. Housing Demand is on the Rise 200 190 2,000

180 170

1,500

160 1,000

150 140

500

S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index

New Home Starts (Thousands of Units)

2,500

130 120 3/31/17

3/31/16

3/31/15

3/31/14

3/29/13

3/30/12

3/31/11

3/31/10

3/31/09

3/31/08

3/30/07

3/31/06

12/30/05

0

Source: Bloomberg, Janus Henderson. Data as of 3/31/2017 Note: The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index is a composite of single-family home price indices for nine U.S. Census divisions.

Global Equity Outlook Summer 2017

10

The Risk of Volatility •

The VIX Index, an estimate of expected volatility, is near multiyear lows. If that reverses, and the VIX moves higher, investors should likely expect more volatility

•

But a higher VIX doesn’t necessarily signal a market downturn

THE WAY FORWARD: Higher volatility can lead to new investment opportunities and, as a result, potentially higher returns. S&P 500 Index Returns vs. VIX Level since 1990 Stock returns can rise even as expectations for market volatility increase 6%

Avg. 3-Month Return

5% 4% 3% 2% 1% 0% Below 15

15 to 25

25 to 35

Above 35

VIX Level Source: Bloomberg, Janus Henderson. Data are for 12/31/1990 to 4/28/2017 Note: VIX level reflects CBOE Volatility Index.

Global Equity Outlook Summer 2017

11

Stretched Valuations •

Price-to-earnings (P/E) ratios have climbed but are not extreme. Still, earnings will have to drive future returns

•

We think profit growth could surprise to the upside, lowering current P/Es

THE WAY FORWARD: Focus on firms that can deliver earnings growth as a result of competitive positioning. Global P/Es In most cases, valuations do not look stretched based on earnings growth and other factors

Profits and P/Es Earnings growth can help offset rising P/Es P/E

EPS 30

25%

20 P/E

20% 15%

15 10 5

10%

2014

2015

Source: Bloomberg, Janus Henderson. Data as of 5/15/2017 Note: Based on Russell 1000 Index.

Global Equity Outlook Summer 2017

2016

YTD

MSCI ACWI Index

MSCI World Index

MSCI Europe Index

MSCI EM Index

MSCI EAFE Index

MSCI All Country Asia Pacific Index

2013

MSCI World ex-USA Index

2012

MSCI ACWI ex-USA Index

-5%

Russell 3000 Index

0%

Russell 2000 Index

5%

Russell 1000 Index

0 S&P 500 Index

YOY Change

Implied*

25

Source: Bloomberg. Data as of 5/31/17 *Assumes 2.34% dividend yield, risk premium of 4% and earnings growth of 2%.

12

Political Uncertainty •

The gap between sentiment (soft data) and spending (hard data) has been narrowing, but is still wide

•

Thoughtful tax reform (including for corporate cash repatriated from overseas), new health care policy and infrastructure spending could help close the gap

•

But it remains to be seen if President Trump can achieve his ambitious agenda

THE WAY FORWARD: We think corporate spending will rise to meet sentiment, but political risk remains. Soft Data vs. Hard Data The gap between consumer sentiment and corporate spending is starting to narrow Consumer Sentiment

Cash Held Overseas (Billion USD) S&P 500 Index Constituents

New Orders Apple $216

150

Other $253

140 130 120 110

Gilead Sciences $27

100

Qualcomm $30

Microsoft $109

Amgen $36 3/31/17

9/30/16

12/31/16

3/31/16

6/30/16

9/30/15

12/31/15

6/30/15

3/31/15

9/30/14

12/31/14

3/31/14

6/30/14

9/30/13

12/31/13

3/31/13

6/30/13

12/31/12

9/30/12

3/31/12

6/30/12

12/31/11

90

Source: Bloomberg, Janus Henderson. Data as of 3/31/2017 Note: Data indexed to 100 as of 12/31/2011 and reflect the University of Michigan Consumer Sentiment Index and the U.S. Manufacturers' New Orders Total Index.

Global Equity Outlook Summer 2017

General Electric $39 Johnson & Johnson $41 Oracle $48

Cisco Systems $60 Alphabet (Google) $52

Source: Bloomberg. Data as of 5/31/2017

13

The End of Monetary Stimulus Nears •

The Federal Reserve has dramatically lowered interest rates and increased its balance sheet. The same holds true for the European Central Bank

•

Now the central banks are considering how to carefully unwind that stimulus

•

Should investors worry?

THE WAY FORWARD: Monetary tightening could create negative headlines but the process is likely to be slow. Plus, long-term yields globally have ample room to rise. Central Bank Total Assets Federal Reserve

10-Year Government Bond Yields

European Central Bank

2.5%

$5.0

2.0%

$4.0

1.5%

$3.5 $3.0

Yield

Weekly Level (Trillion USD)

$4.5

$2.5

1.0%

$2.0

0.5%

$1.5 $1.0

0.0%

$0.5

Source: Bloomberg. Data as of 5/31/2017

Global Equity Outlook Summer 2017

5/31/17

5/31/16

5/29/15

5/30/14

5/31/13

5/31/12

5/31/11

5/31/10

5/29/09

5/30/08

5/31/07

5/31/06

5/31/05

5/31/04

5/31/02

5/30/03

5/31/01

1/31/00 5/31/00

$0.0

-0.5%

France

Germany

Spain

Switzerland

UK

U.S.

Source: Bloomberg. Data as of 5/31/2017

14

Global Market Bright Spots

Positive on China: The country’s stabilizing economy is good for equities

Europe Recovers: European equities start to look attractive

New Opportunities: Active strategies could offer the right blend of price discovery and liquidity

Global Equity Outlook Summer 2017

15

China’s Outlook Improves •

China’s economy appears to be stabilizing, as shown by consumer spending, which has leveled off after a long period of decline. That is good for global growth and equity market stability

•

China’s reserves have started to stabilize and capital outflows have slowed. That creates a stronger renminbi, which could minimize the risk of a trade war

THE WAY FORWARD: We believe the outlook for China has improved, which is positive for U.S. companies and for Europe’s economic recovery. China's Foreign Exchange Reserves $4.2

20%

$4.0

18%

$3.8 Trillion USD

16% 14% 12%

$3.6 $3.4 $3.2

10%

$3.0

Source: Bloomberg. Data as of 4/30/2017

Global Equity Outlook Summer 2017

4/30/17

4/30/16

$2.8 4/30/15

4/30/17

4/30/16

4/30/15

4/30/14

4/30/13

4/30/12

6/30/11

8%

5/31/14

YOY Growth

Retail Sales in China After a long period of decline, China's consumer spending growth rate has started to stabilize

Source: Bloomberg. Data as of 4/30/2017

16

Europe Recovers •

Consumer confidence and other economic indicators are improving in Europe

•

Earnings, as a result, could grow along with an economic recovery, making European equities’ low valuations appealing

•

The UK’s Conservative Party lost its parliamentary majority in June, creating uncertainty about the terms of Brexit. But equities were resilient, and results from other key European elections have been market-friendly

THE WAY FORWARD: The European equity market looks to be in the early stages of recovery and offers the potential for higher relative returns. Confidence Improves Consumers in the European Union are less pessimistic about the future

Finding Value in Europe The gap between U.S. and European equity valuations has widened U.S. % Premium

0 -5

U.S. Stocks

25

25%

20

20%

15

15%

10

10%

5

5%

0

0%

-20 -25

Premium

-15 P/E

Source: Bloomberg. Data as of 4/30/2017 Note: European Commission Consumer Confidence Indicator Eurozone.

Global Equity Outlook Summer 2017

4/28/17

4/30/17

4/30/16

4/30/15

4/30/14

4/30/13

4/30/12

4/30/11

4/30/10

4/30/09

4/30/08

4/30/07

4/30/06

12/31/05

-40

4/30/16

-35

4/30/15

-30

1/31/14 4/30/14

Confidence Score

-10

European Stocks

Source: Bloomberg, Janus Henderson. Data as of 4/28/2017 Notes: Data based on MSCI Europe Index and Russell 1000 Index.

17

The Case for Active Investing •

Private equity fundraising has been strong, with ample capital waiting to be invested. That could help drive mergers and acquisitions (M&A), a positive for stocks

•

Investors continue to favor passive strategies, but active investing is essential to price discovery

THE WAY FORWARD: Look for active investment strategies to capitalize on M&A opportunities in ways that passive strategies cannot and with more speed and liquidity than private equity. Private Equity Capital Raised

Middle Ground Active investing provides the liquidity of passive strategies with the price discovery of private equity

$600

Price Discovery

$500

Private Equity

Billion USD

$400

$300

Time Horizon

$200

Active Equity $100

Source: Private Equity International

Global Equity Outlook Summer 2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

$0

Passive Equity Source: Janus Henderson

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