Yield of Dreams

U.S., Europe, Japan: The New Engines of Growth?

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The emerging markets have been a boon for investors for the last couple years, with analysts predicting record growth for the future. But the engine of growth is shifting from emerging market countries to developed countries, said Shep Perkins, Putnam Investments’ co-head of international equities. The U.S., Europe and Japan are benefitting the most from that shift, he said during a Putnam media briefing on the equity markets this morning.

Things have stabilized in Europe, which has kept pace with the S&P 500 for the first time since 2009, Perkins said. Consumer confidence is starting to be restored from very low levels, as unemployment trends down. Countries have made headway with reforms in Europe. At the same time, many companies have brought in new management and finally shifted their focus toward profits, which they haven’t focused on in the past.

Japan now has new leadership in place that has been successful, and its markets have also kept pace with the S&P 500 this year, Perkins added.

At the same time, the emerging markets have experienced a slowdown, where you’ve seen indiscriminate selling of stocks, Perkins said. Brazil, Indonesia, South Africa and India have been hit the hardest. But when you have indiscriminate selling, it creates one-off opportunities in which you can buy good companies that are down 40 percent, for example.

Perkins is most concerned with China, which has been shifting from infrastructure building to a consumer-led economy. But the transition has not been seamless. For example, China has consumed more cement in the last four years than the U.S. has in its entire history.

The U.S. market is up 24 percent so far this year, and earnings growth is strong, said Bob Ewing, co-head of U.S. equities at Putnam. From 2012 to 2013, there was a shift in the way the equity market has behaved, going from high correlation and a macro environment dominating the micro environment in 2012 to low correlation and a micro environment dominating the macro. Valuations have been very homogenous across the market—meaning stocks are trading at the same multiples. In that environment, you should select for growth, not valuation characteristics, he said.

The stock-picking environment is outstanding, said Nick Thakore, co-head of U.S. equities. Before, investors were seeking yield and safety—going for defensive stocks. But as we get to a more normal environment, fundamentals and valuations will dominate the market, and economically-sensitive stocks are likely to outperform.

There’s a concern out there that corporate margins are at their peak and are not sustainable, Thakore said. But he believes that what’s happening is rational, and that margins have more room to grow because corporations have re-made themselves. In the past, GM, for example, had to sell 14 million cars to break even; now it’s 10 million.

As far as interest rates going higher, unless it’s dramatic and severe, it won’t affect equities, Thakore said. From 2009 to 2011, the 10-year Treasury averaged 3 percent, and we’re not even back up to that level yet. In the near term, rates are unlikely to get higher without some positive economic news.

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