Between potentially polarizing European elections and tough talk from North Korea, geopolitical risks are on the rise. This is not good news. However, for equity investors,
something important is happening to global earnings: they are also on the rise. Not only
are they up, but earnings revisions, an important forward indicator, are also increasing. Even more interesting is that, for the first time in years, the relationship between earnings upgrades and downgrades is better for international equities than for US equities, according to Bloomberg data. The ratio of upward earnings revisions is highest in Europe and Japan, and lower in the US and emerging markets—though they are still good by historical standards.
Global Earnings Revised Upward on Bets of Global Growth and Inflation
Source: Bloomberg. Last data point 4/28/17.
Dividend Yields Look Attractive
Global equities are also attractive compared to bonds, based on dividend yields as of
April 28, 2017. The yield on European equities, as measured by the Euro Stoxx 50® Index
of European blue chip stocks, was 3.28%, while 10-year Eurozone bonds yielded 0.32%.
In Japan, the dividend yield was 1.94% according to the MSCI Japan Index (a measure
of the large and mid-cap segments of the Japanese market), while the 10-year bond has
held at 0% due to Japanese central bank policy. In the US, the dividend yield as
measured by the Standard & Poor’s 500® Index (S&P 500) was 1.96% against recent 10-
year Treasury bond yields at 2.28%. (Source for 10-year bond yields: Bloomberg) When
stock buybacks are added to dividends, the real yield of the S&P 500 has averaged about
5% every year since 2011, according to Bloomberg.
Bottom line: we believe global equities are more attractive than bonds in the current
market, based on these valuations. Global equities still look favorable for long-term
investors. The outlook for a market-friendly outcome in the French elections adds to
investor confidence in European equities. While many other geopolitical risks could
quickly unwind this scenario, Europe and Japan are finally interesting. Equities have
tended to perform well when earnings rise and they offer attractive yields versus bonds.
We believe the fundamentals point to the potential for significant upside for global