LONDON | JP Morgan on Monday warned the investor community about Greece’s bailout negotiations being too dominant an influence on their immediate plans. The global asset management firm said that
“Though investors will undoubtedly be focused on the negotiations over Greece’s second bailout this week, it may be worthwhile to step back and consider the broader outlook for equity markets for the year.”
Since last October, according to JP Morgan research, prices have risen over 17% (MSCI ACWI), reducing the discount the market had been trading at by 10% (the current forward multiple is still 28% below its average since 1987). Provided the euro area authorities finally grasp the key demands made by the markets and offer stabilising solutions, JP Morgan analysts believe risk aversion can further fall so
“equity prices should be driven less by swings in sentiment and more by the outlook for company profits.”
“There is wide dispersion even at the regional level in earnings growth rates, with different sectors affecting the returns of each market in its own way,” they added.
For the fourth quarter of last year, experts expect developed markets DM to produce net income gains of just 3% over the same quarter in 2010. This compares to projections of 7% for emerging market EMs, with emerging Asia and EMEA even better (Petrobras explains much of the negative change in LatAm. If the company is excluded, the growth rate is 2%). Despite the better earnings growth in emerging markets relative to developed markets in 2011, EM equities nonetheless underperformed DM equities for the year. This is one reason EM equities may do better in 2012: with widespread risk aversion no longer depressing returns, better earnings growth should be reflected in relative price appreciation.
More important for future returns, though, are the expected gains in company profits. The research shows that growth rate in the US dropped from 19% in 3Q11 to 8% in the fourth quarter but it should maintain that pace throughout the year.
“Even if the economic landscape is only modestly positive, we believe that US corporations are continuing to find ways to improve productivity and increase earnings per share EPS. Business investment should be maintained thanks to low interest rates and large cash balances, but share buybacks may become a key means to boost EPS.”
Analysts forecast European corporations to increase profits by 7% this year, though for euro zone companies this may reflect more a rebound from the very negative results in 2011. Emerging market growth is projected to be just slightly better than developed markets, 8% compared to 7%, but this figure is depressed by the drop in earnings for Russia’s energy sector, JP Morgan pointed out.