Head of BofA Global Research
The Bulls are back in town! This week we discuss a return of bullishness on Wall Street and what Asia/Emerging Market growth metrics aren’t telling you.
The Global Fund Manager Survey (FMS) suggests investors have become more bullish in the last month after fears of inflation and China pessimism made last month’s survey the least bullish in a year. Despite higher costs and supply chain difficulties, margins were strong this earnings season, pushing profit expectations back into positive territory and 61% of those surveyed now believe that inflation is transitory.
Improved sentiment drove allocation to United States (U.S.) equities higher by 13ppt M/M, and the U.S. overweight amongst respondents is now the highest since 2013. Investors don’t expect an aggressive Fed tightening, which aligns with the transitory inflation view. Although investors did reduce some of their exposure to inflation assets such as energy, banks and industrials, versus history they’re still overweight. Chief Investment Strategist Michael Hartnett also observed an uptick in the desire of companies to spend more on capex. As for 2022, Emerging Market equities were picked to be the best returning asset after substantially lagging U.S. and European indices in 2021. The S&P 500 was a close second.
Asia and Emerging Markets (EM) have long been a popular region for investors looking for higher nominal growth and diversification.
However, Asia Pacific Equity Strategist Ajay Kapur tells us that hidden underneath the rosy growth metrics for Asia/EM is a steady dilution of equity that consistently eats away at what investors actually receive - earnings per share (EPS). Since 1995, Asian EPS has consistently lagged behind U.S. EPS. Ajay explains that despite higher sales growth, Asia/EM suffers from chronic weakness in Return on Equity (ROE) when compared to the U.S. due to weaker margins and lower asset turns (measured as sales-to-assets). For those suggesting a mean reversion away from U.S and into Asia/EM, the downtrend in potential growth and high leverage make this unlikely. For outperformance in Asia/EM equities, Ajay suggests active over passive investing and fishing out a set of earnings compounders – or as Warren Buffett puts it, “find a good bunch of businesses and hold them".
We wish our U.S. readers and their families a safe and happy Thanksgiving. Must Read Research returns on December 6th.