Robeco
April 28, 2021
A global leader in sustainable and quantitative investing.

From deep value to ‘value with a future’

Michiel Plakman - Portfoliomanager Robeco Global Stars Equities | Wim-Hein Pals - Head of Emerging Markets team

As the global economy continues to recover, our positive stance on global equity markets remains well underpinned. Both our developed (DM) and emerging markets (EM) teams have remained positive on their respective equity segments.

Speed read

  • Our stance remains positive for both EM and DM
  • Value still has potential to perform, but investors likely to be more selective
  • North Asia remains a bright spot and we turned more positive on US equities

Parts of the world are still wrangling with Covid-19 and lockdowns, and sometime in the second quarter of 2021, the market is likely to start anticipating the dreaded t-word (‘t’ for ‘tapering’). Yet countries are learning to co-exist with a pandemic, the US has sprung on us a USD 1.9 trillion stimulus package, and the Biden administration is working on USD 2.3 trillion in infrastructure investments.

While the fiscal bonanza will impact the US first, the rest of the world will also benefit from its repercussions for global activity. Let’s not forget that the strong recovery expected in global trade is one of the reasons why the International Monetary Fund has lifted its 2021 China GDP growth estimate to an impressive 8.4%.

Clearly, a sizzling economy means higher inflation, but we are still far from levels that would reverse the course of the economic recovery. We are, actually, in the sweet spot for equity markets, as these generally benefit from inflation rising from low levels: historically, the S&P 500 Index has shown outperformance most frequently when CPI was between 1% and 3%.

Both our DM and EM teams have remained positive on their respective equity markets. The only factor that we downgraded, from positive to neutral, is the sentiment factor in EM. We have seen unprecedented investment flows into EM of more than USD 120 billion since October 2020, and we expect inflows to continue but at a slower pace.

Focus on ‘value with a future’
We expect further rotation from the Covid-beneficiary and Covid-defensive stocks to those that will benefit from the economic normalization. This means that value has further outperformance ahead – as long as the economic outlook continues to improve. However, we expect an increased degree of selectivity among investors in their choice of stocks.

Investors will start to look for stocks with the ability to deliver on their perceived value, showing better earnings potential in a normalization of the macroeconomic backdrop. Therefore, after the first wave of value investing boosted all cheap stocks, we expect the second wave to focus on what we call ‘value with a future’, i.e. companies with inexpensive valuations that do not discount their sustained earnings growth ahead.

Our largest overweight across portfolios remains North Asia, although we have taken some profit in China, where we expect market momentum to slow down. Credit growth in the country has peaked, and this is likely to lead earnings to peak. Moreover, around 40% of the weight of the MSCI China Index is in internet-related stocks. This affects the index in the rotation away from expensive and often loss-making digital stocks.

That said, the main change from a country standpoint in our Global Equity portfolios occurred in DM, as we have added to US equities at the expense of Europe. The US is more advanced in fighting the pandemic, and has significantly stepped up fiscal stimulus. We believe that a recovery in the US will be much stronger than in Europe for the foreseeable future, and that US equities will benefit.

Read the full Fundamental Outlook

Start searching for ‘
value with a future
Fundamental Equities Outlook Q2 2021
For professional investors
April 2021
Robeco Fundamental Equity Team
We remain positive on global equities
With most major equity indices at or close to all-t
ime highs, the tactical stance of any opinion write
r who wants to sound
smart and hedge her bets would be to point out all
that could go wrong. Yet, with a global economy on
the mend, driven
by a surging US macroeconomy and central banks whic
h – thus far – remain supportive, I will gladly tak
e the risk of
sounding less smart and state that our positive sta
nce on global equity markets remains well underpinn
ed. Of course,
when everything looks good and expectations are hig
h, a lot can disappoint, and I will point out some
key hurdles ahead.
Undeniably, some parts of the world are still wrang
ling
with Covid-19 and lockdowns, and sometime in the se
cond
quarter of 2021, the market is likely to start anti
cipating
the dreaded t-word (‘t’ for ‘tapering’). Moreover,
Archegos
Capital has reminded us how easy it can be even for
a
single-family office to create havoc in global equi
ty
markets. On the bright side, the world is learning
to co-
exist with a pandemic, the US has sprung on us a US
D 1.9
trillion stimulus package, and the Biden administra
tion is
working on USD 2.3 trillion in infrastructure inves
tments.
Fundamental Equities Outlook
Q2 2021
Start searching for ‘value
with a future’
We remain positive on global equities
We expect the rotation from growth to value to cont
inue – with a twist
From deep value to ‘value with a future’
For a change, the upcoming earnings season will mat
ter
2 |
Start searching for ‘value with a future’
While the fiscal bonanza will impact the US first,
the rest of the world will also benefit from its re
percussions for global
activity. Let’s not forget that the strong recover
y expected in global trade is one of the reasons wh
y the IMF has lifted its
2021 China GDP growth estimate to an impressive 8.4
%.
Clearly, a sizzling economy means higher inflation,
but we are still far from levels that would revers
e the course of the
economic recovery. We are, actually, in the sweet s
pot for equity markets, as these generally benefit
from inflation rising
from low levels: historically, the S&P 500 Index ha
s shown outperformance most frequently when CPI was
between 1%
and 3%. The Robeco Macro Team estimates that headli
ne CPI in the US will likely peak at 3.7% in May –
driven by the
higher energy price comparisons – but is likely to
come down to 3% by year end, with core inflation ar
ound 2%.
We are also not concerned about the recent rise in
yields. This was a consequence of higher inflation
expectations, which
in turn are driven by the strong economic outlook.
In the end, real yields are what counts, and we are
still comfortably in
negative territory. Clearly, any trigger that would
lead to a renewed rise in inflation expectations n
eeds to be monitored.
Even though central banks would prefer to keep real
yields low, this is not fully in their control. On
ce the Fed starts
discussing tapering, possibly later in the second q
uarter, this could trigger a further increase in re
al yields, at which point
it will be up to the strength of the economic outlo
ok to save the day.
The elephant in the room, from a recovery standpoin
t, is continental Europe, which is still in the mid
st of the third wave
of Covid-19. Restrictions remain in place in most E
uropean countries and the risk is that these could
get stricter, given
that the pace of the vaccination roll-out remains d
isappointing. While this will undoubtfully delay th
e full reopening of
the European economy, the underlying economic momen
tum has far from stalled. The manufacturing PMI of
the
Eurozone has now reached a remarkable 62.5 and the
nonmanufacturing PMI has continued to improve, with
the recent
read only slightly below 50. Even the economic sent
iment indicator of the European Commission came in
at 100.9, a 13-
month high.
Importantly, we expect that, by end of the second q
uarter, most of the vaccine supply constraints in E
urope will fall away.
By then, the European Union (EU) should have enough
supplies to vaccinate close to 70% of its adult po
pulation. This
means that, as long as European governments are abl
e to execute on the vaccination effort, by end of Q
3 we could make
significant steps toward a reduction of the lockdow
ns. In the meantime, there is still sufficient fisc
al stimulus in place, as
well as abundant monetary support – as the recent m
onthly increase in APP & PEPP purchases by the ECB
have shown.
From deep value to ‘value with a future’
As the global economy continues to recover, we expe
ct further rotation from the Covid-beneficiary and
Covid-defensive
stocks to those that will benefit from the economic
normalization.
Many investors simplistically interpret this as a r
otation from growth to value. There is more to this
. To understand what
lies ahead, we need to look below the surface. Ther
e are two aspects to what we have seen happening in
equity markets
over the last quarter.
First, value comes in different shades. We have wit
nessed the initial rotation phase from growth into
value. This was a
classic start of the reflation trade, where investo
rs bought into the cheap laggards. This has meant t
hat deep value stocks
have outperformed the broader market. We saw this t
hrough most of the first quarter in developed marke
ts (DM) and,
since mid-February, in emerging markets (EM).
We believe that value has further outperformance ah
ead – as long as the economic outlook continues to
improve.
However, we expect an increased degree of selectivi
ty among investors in their choice of value stocks.
Investors will start
to look for stocks that have potential to deliver o
n their perceived value, showing better earnings po
tential in a
normalization of the macroeconomic backdrop. Theref
ore, after the first wave of value investing booste
d all cheap stocks,
we expect the second wave to focus on what we call
‘value with a future’, i.e. companies with inexpens
ive valuations that
do not discount their sustained earnings growth ahe
ad. Given the polarization that we have seen in equ
ity markets over
the course of 2020, we still see attractively value
d opportunities to choose from.
The result is that investors will start paying more
attention to the sustainability of earnings going
forward. This is likely to
bring more prominence to issues such as the expecte
d impact of high input costs on certain companies’
earnings,
following the acceleration in PPIs. The quality of
balance sheets should also be under tighter scrutin
y, since real yields
are destined to rise further at some point.
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Overall, we need to be aware that some companies wh
ose stocks were bought as ‘reopening’ trades will b
e structurally
weakened by the consequences of the lockdown, and a
re therefore unlikely to recover as the market may
expect.
Indeed, we have already started seeing some signs o
f the change of guard within value in both DM and E
M from the
second half of March. Since then, value stocks with
low expected price-to-earnings ratios have started
to improve their
performance compared to stocks with low price-to-bo
ok ratios.
Secondly, as we have also discussed in the past, 20
20 was not only about growth, but also about extrem
ely polarized
market positioning. We call this the ‘headline effe
ct’. Stocks with a well-recognized brand or story s
aw unprecedented
buying relative to the rest of the market. This may
have been – at least in part – due to the more act
ive retail participation
in single-stock positions that we witnessed in 2020
. The headline effect has been so extreme that the
polarization
between growth and value has not only been visible
between sectors, but also within sectors. This has
left active investors
with what in our view is a significant
opportunity to generate investment returns via indi
vidual stock selection.
As we reminded our clients last quarter, alongside
all the well-known new energy and upcoming vehicle
brands, and for
all the high-profile digital giants, there are a nu
mber of companies that I like to call ‘enablers’. T
hese are part of the chain
of products or services that support those big-name
players, as well as companies that will be driven
by those same
trends. While their products are not as prominent o
r as glitzy, they will be growing in parallel. This
is where much of the
‘value’ lies. Many of these stocks are still tradin
g at reasonable valuations, although they are no lo
nger as easy to find as
at the end of 2020. We have already started seeing
investors broadening their appetite for these stock
s, as market returns
across both DM and EM are now less concentrated. We
believe this trend will continue.
For a change, the upcoming earnings season will mat
ter
If investors do begin to pay more attention to how
tenable company earnings are, the impending first q
uarter earnings
season is likely to be a good starting point. The m
ost interesting aspect of the last earnings season
in the US and Europe
was the muted price action. Both the US and Europe
saw a negative skew to price action on the day of t
he results,
meaning that stocks whose EPS beat expectations out
performed less than the misses underperformed. The
market
appeared to be sending a clear message that, for th
ose companies delivering strong fourth quarter resu
lts, the strong
results were already priced in, and that these comp
anies were likely to become less of a focus as the
economy reopened.
As a result, we saw the rotation from the Covid-19
beneficiaries and Covid-19 defensives to the reopen
ing hopefuls. I
believe the upcoming earnings season will set a dif
ferent tone, and the market will pay more attention
to the actual
results.
We saw the market being driven by multiple expansio
n in 2020, which investors were willing to consider
as the scarcity
premium to buy into companies with positive earning
s momentum. As economic growth picks up across the
world, the
market is likely to be less willing to pay such a s
carcity premium, especially as the Covid-19 benefic
iaries will be facing
tougher comps from the second quarter onwards. At t
he same time, with the laggards-scooping frenzy of
the first quarter,
some reopening trades have run up significantly. Co
mpanies will have to live up to their increased val
uations. Therefore,
it is possible that we could see not only a pullbac
k in expensive defensives that disappoint on guidan
ce, but also in
reopening trades that don’t live up to expectations
. Unlike the previous quarter, this earnings season
will matter.
What could go wrong?
While we remain positive on global equities, there
are a number of risks lurking in the background, th
at we need to be
aware of and monitor.
The t
The tThe t
The t-
--
-word.
word.word.
word. The next big hurdle that investors will have
to digest is the start of tapering. We believe it’s
likely that the
Fed will aim at completing tapering before the firs
t rate rise. If we assume a first Fed rate hike in
2023 – which is what
our Macro team expects – and the tapering process i
tself to last 9 to 12 months – based on the experie
nce up to October
2014 – then we are looking at tapering to start som
etime in the first half of 2022. Markets would not
wait for the process
to begin before starting to price it in. This means
that we could see some anticipation later in the s
econd quarter, and
maybe as early as May, when the April FOMC minutes
are released. Equity markets are likely to be less
than enthusiastic
about the t-word. Only proof that the economic mome
ntum remains solid, and that tapering will be gradu
al enough not
to disrupt it, would assuage them. So, it will all
depend on how Covid-19 develops in terms of vaccina
tions, new strains
and lockdowns. We don’t see any reason to hit the p
anic button on global equity markets at this point,
as we believe the
economic recovery will continue and the Fed will be
mindful of not spooking markets.
4 |
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That said, equity markets may see an increase in vo
latility and we are likely to see selling pressure
in some areas, including
companies and countries with weak balance sheets. T
his could include the most fragile EMs, although th
e list is likely to
be significantly shorter than in the taper tantrum
of 2013. Most countries are in far better fiscal an
d monetary shape now
than at that time. As long as global economic growt
h continues to improve and broaden, any volatility
is likely to be short
term and localized. Let’s not forget that between m
id-2004 to mid-2006, when the Fed hiked rates by 42
5 basis points,
the S&P 500 Index saw a price increase of 12%, whil
e the MSCI Emerging Markets Index rose 79% in US do
llars. The key
for equities, particularly in EM, is not what the F
ed does, but the outlook for growth.
Higher taxes.
Higher taxes.Higher taxes.
Higher taxes. An increase of the US corporate tax r
ate from the current 21% is also likely to cause ri
pples in the US equity
market, as would a tax on earnings at the source fo
r the large digital platforms. This will happen at
some point, but
timing and details are still unclear. Depending on
the newsflow, we are likely to see occasional press
ure on companies
that would be hardest hit. More importantly, the US
is not the only country that will look at replenis
hing the government
coffers after unprecedented fiscal stimulus. The ri
sk is that some countries may take fiscal consolida
tion steps too soon.
The room for policy errors remains limited until th
e economic recovery becomes more broad-based.
Stronger US dollar.
Stronger US dollar.Stronger US dollar.
Stronger US dollar. The greenback has paused its as
cent for now. This has coincided with the retrenchm
ent of US long-
term yields. As long as the global economic recover
y continues and broadens, the US dollar should rema
in relatively
stable. It could weaken if investors increase their
appetite for riskier assets, including non-US asse
ts. However, should the
differential in growth outlook between the US and t
he rest of the world widen further, the US currency
could also reprise
its ascent. In a lower growth scenario, EM is the r
egion that could be affected the most, and we conti
nue to look at the
asset class on a market-by-market basis. Countries
with higher inflationary pressure and less room – o
r will – for monetary
tightening, such Turkey and Argentina, remain most
at risk.
Implications for our portfolios
Both our DM and EM teams have remained positive on
their respective equity markets. The only factor th
at we
downgraded, from positive to neutral, is the sentim
ent factor in EM. We have seen unprecedented invest
ment flows into
EM of more than USD 120 billion since October 2020,
and we expect inflows to continue but at a slower
pace.
Our largest overweight across the Global and EM por
tfolios remains North Asia (China, Taiwan and South
Korea),
although we have taken some profit in China, where
we expect market momentum to slow down. Firstly, cr
edit growth
in the country has peaked, and this is likely to le
ad earnings to peak later in the year. Secondly, ar
ound 40% of the weight
of the MSCI China Index is in internet-related stoc
ks. This affects the index in the rotation away fro
m expensive and often
loss-making digital stocks.
That said, the main change from a country standpoin
t in our Global Equity portfolios has occurred in D
M, as we have
added to US equities, moving to an overweight posit
ion, at the expense of Europe. The US is much furth
er advanced in
fighting the pandemic than the EU, and has signific
antly stepped up fiscal stimulus. Hence, we believe
that a recovery in
the US will be much stronger than in Europe for the
foreseeable future, and that US equities will bene
fit.
Information Technology remains the largest sector o
verweight in our DM and EM portfolios and, within I
T, we prefer
hardware to the expensive internet-related names.
We had already started to take profit in the high-f
lying Information
Technology and Communication services sectors last
year, and we continued earlier in the quarter, doin
g the same also
in China and, to a lesser extent, Taiwan. Since las
t year, and earlier this year, we have added to the
financials, consumer
discretionary, materials and industrials sectors. M
ost importantly, and on the back of the polarizatio
n of returns that has
been a legacy of 2020, we have often rotated positi
oning within the same sectors, reducing expensive n
ames and adding
to companies where we believed the positive earning
s outlook had flown under the market’s radar and wa
s not yet
discounted in valuations. We remain mindful of the
importance of the quality profile of the companies
that we invest in.
Selection remains key, as not all companies will be
able to recover from the effects of extended lockd
owns.
5 |
Start searching for ‘value with a future’
To conclude, despite global equities having reached
new highs and valuations being – on average – seem
ingly stretched,
we remain positive on the asset class. As we have s
aid before, the problem with averages is that they
are averages. We
continue to believe that current valuation levels w
ill not put a damper on global equites upside. They
will, however,
determine where we find more opportunities. Firstly
, not all markets are richly valued, and certainly
not all stocks. The
exceptional polarization that we have seen in stock
performances over 2020 still allows active investo
rs to find attractive
stocks at more reasonable valuations. Secondly, we
don’t expect global multiples to expand further. In
stead, earnings
upside will drive the market forward. Start searchi
ng for ‘value with a future’.
I wish you an enjoyable and, hopefully, valuable re
ad. Please feel free to reach out to us with any co
mments or questions
you may have.
Fabiana Fedeli
Global Head of Fundamental Equities
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Table of contents
Developed Markets Equities | All systems go
..................................................
...................................................
......7
Emerging Markets Equities | Large-scale vaccination
programs should lead to re-opening
...................................... 10
7 |
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Developed Markets Equities | All systems go
Vaccinations are gathering pace in the US, Europe
lags
Global economic growth expectations revised upward
Fed and ECB to remain on hold until the recovery is
assured
Five-factor summary
Factors
Score
Macro
+
Earnings
+
Valuation
=
Technical
+
Sentiment
=
Total
TotalTotal
Total
+
++
+
Source: Robeco Global Equities Team
We maintain a positive outlook for developed market
s
(DM) equities. The macroeconomic environment contin
ues
to be very supportive for equities. Global economic
growth
forecasts are being revised upwards, while interest
rates
and inflation expectations should continue to norma
lize.
As long as interest rates and inflation do not over
shoot, we
expect the environment to remain benign for equity
markets. Positive global earnings revisions also re
main
very supportive, especially when we compare the wor
st
quarters of last year, where we saw the full impact
of the
Covid-19 pandemic in both Q2 and Q3 of 2020. While
DM
equities are not cheap, we also think that the rota
tion that
we have seen this year from expensive growth names
to
cyclical value names will continue. The valuation o
f the
market is just an average and it does not tell the
full story.
Some pockets of the market remain cheap while large
cap
growth stocks names are still too expensive. Techni
cal
analysis remains supportive for the overall market,
given
that the value rotation suggests a broadening of th
e
recovery. Last year, the overall market was pushed
higher,
driven primarily by the Information Technology and
Communication Services sectors. Currently, we see a
growing participation from the more cyclical sector
s, too.
Figure 1 | Global PMIs for both DMs and Ems are rec
overing
Source: IBES, MSCI, March 2021
All systems go
So far this year, we have seen DM equities rise by
about 9%
in euro terms. Still, it doesn’t feel that way, as
the most
visible large cap growth names have lagged the mark
et,
while cyclical names in Energy, Materials, Industri
als and
Financials have rallied strongly. We think the curr
ent
‘goldilocks’ environment for DM equities will preva
il for
some time, as the global economy is only starting t
o
recover. Currently, consensus expectations point to
global
GDP growth of 5-6%, with emerging economies growing
slightly faster than developed ones. That said, eco
nomic
growth in DM is still expected to reach about 5% in
2021.
With the recovery, interest rates have started to r
ise,
inflation expectations are picking up and yield cur
ves have
begun to steepen. At the same time, central banks a
ppear
to be willing to hold off for now, as they want to
see
evidence of a sustained recovery before winding dow
n their
support. Therefore, 2021 is likely to be another go
od year
for DM equities.
Figure 2 | Economic growth estimates for 2021 for b
oth EM and DM
Source: IBES, MSCI, March 2021
More fiscal stimulus is coming in the US
US president Joe Biden managed to get a substantial
additional stimulus package of about USD 1.8 trilli
on
approved. This comes on top of earlier fiscal stimu
lus
packages and will have a significant impact on over
all US
economic growth, both this year and next. Current
consensus expects 6% US GDP growth this year, and
around 5% next year. In addition, Biden has indicat
ed that
the US will continue to ramp up vaccinations to hel
p the US
economy return to normal as quickly as possible. Th
e target
is to reach 200 million vaccinations by the end of
April. The
US is much further advanced in fighting the pandemi
c than
the European Union (EU), which seems incapable of
getting its act together. As a consequence, we have
adjusted our portfolio positioning by adding to US
equities
and moving to an overweight position in North Ameri
ca, at
the expense of our position in Europe. We think tha
t a
recovery in the US will be much stronger than in Eu
rope
8 |
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and that US equities will benefit. We see much more
opportunity for US long rates to rise, causing a st
eepening
yield curve, as the Fed will control the short end
of the
curve. This should help US Financials, in particula
r domestic
banks. At the same time, rising long rates are a pr
oblem
for high-duration growth stocks in Information Tech
nology
and Communication Services. For this reason, we hav
e
added to US Financials and have lowered our overall
weight in US Information Technology and Communicati
on
Services.
Europe starting to see the third Covid-19 wave
Compared with the US, the economic recovery in Euro
pe
appears to be more moderate. Most European economie
s
remain paralyzed by lockdowns, as a third Covid-19
wave
approaches. As a consequence, economic growth
expectations for the EU for 2021 are far more modes
t than
for the rest of the world. To give an example, Germ
any,
which is probably amongst the stronger European
economies, is expected to rebound to about 3% GDP
growth in 2021. For now, from a top-down perspectiv
e, we
strongly prefer other regions with more dynamic gro
wth
opportunities than Europe.
Japanese economy will start to recover as well
We do think the Japanese economy is poised to recov
er as
well. Current consensus GDP forecasts expect 2-3% G
DP
growth for Japan in 2021. The turnaround of the glo
bal
economy will show the operational leverage in Japan
ese
earnings. Some improvement is already visible in re
cent
results, but it will accelerate in the new fiscal y
ear from the
end of March 2021. The remarkable weakness in the y
en
will give another bump to earnings. Relative perfor
mance
has picked up and we expect foreign investors to mo
ve
more decisively to the buy side. Equity also looks
more
appealing to locals, as bond yields remain super lo
w.
Valuations remain attractive but investors need to
monitor
the progress of companies to act in the interest of
shareholders and focus on higher ROE. One striking
point
is that economies in Asia-Pacific in general have b
een far
less affected by the Covid-19 outbreak. It also see
ms like
most large countries in the region have dealt with
the virus
in a relatively efficient way, and that the damage
to their
economies has been far less than in Europe, for ins
tance.
In the global portfolios, we maintain an underweigh
t
position in Japanese equities in favor of Emerging
Asia.
That said, we prefer Japan to other Developed Asia
equity
markets in our Asia Pacific portfolios.
Earnings revisions for the MSCI World Index continu
e to
rebound
Earnings revisions for the MSCI World Index have cl
early
rebounded and look very strong. This should support
equity
markets further. We also like the fact that earning
s
revisions are improving in most sectors and that th
e
earnings recovery is relatively broad based. Year-o
n-year
comparisons will continue to ease into the summer,
as Q2
and Q3 of 2020 were the quarters in which the globa
l
economy was most affected by the Covid-19 pandemic.
Figure 3 | Earnings revisions for the MSCI World co
ntinue to recover
Source: IBES, Robeco, March 2021
Valuations remain high from an absolute perspective
Equity valuations around the world still indicate t
hat,
compared to equities, there are very few attractive
yield
assets available. The MSCI World Index has an avera
ge
forward price-to-earnings ratio of 21 times. It wil
l be
interesting to see what happens to valuation multip
les with
rising rates and the current strong rebound in earn
ings.
With rates rising, there is less scope for multiple
s to rerate
higher. In our opinion, earnings upside will have t
o become
the main driver of equity markets going forward.
Figure 4 | Absolute valuations are high in develope
d equity markets
Source: MSCI, Robeco, March 2021
The main risks to our outlook
Our outlook for DM equities is quite bullish. The m
ain risks
to our outlook are related to new variants of the C
ovid-19
virus and potential new outbreaks, or a disappointi
ng pace
of global vaccinations. We do think that the curren
t
rotation in the market towards more cyclical value
stocks
will continue at the expense of high-valued growth
names.
Implications for portfolio positioning
In the Global Equity portfolios
Global Equity portfoliosGlobal Equity portfolios
Global Equity portfolios, we have moved to a slight
underweight position in European equities and an
overweight position in North America. We also maint
ain an
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Start searching for ‘value with a future’
overweight position in Emerging Asia and are underw
eight
in Japan. We continue to look for companies with a
good
or improving sustainability profile, that also have
a good
long-term ROIC track record and a decent valuation
on free
cash flow. We took some profit over the past quarte
r in the
high-flying Information Technology and Communicatio
n
services sectors, and have added to the Financials,
Consumer Discretionary, Materials and Industrials s
ectors,
to broaden the portfolio and reduce exposure to hig
h-
duration growth stocks.
Regarding our Asia
AsiaAsia
Asia-
--
-P
PP
Pacific portfolios
acific portfoliosacific portfolios
acific portfolios, the outlook for the
region remains promising. We monitor high and risin
g
earnings growth expectations as risk for potential
disappointment. We prefer Japan and South Korea in
the
region.
Japan has been able to maintain its neutral status
in the
US-China trade war and thus can still easily do bus
iness
with both sides. This is relevant for its tech hard
ware and
capital goods leaders. With large cyclical exposure
,
Japanese leading corporations have gone through thr
ee
tough years in terms of earnings performance. The r
apid
shift from growth to value is likely to continue in
a cyclical
upturn, and our portfolios are well positioned for
that.
In Australia, high commodity prices and high home p
rices
support the economy. The local currency is thus lik
ely to
stay strong. Banks have quickly moved back to lofty
valuations. With little else to appeal, we remain
underweight. The global rotation towards value has
generally been much more modest in Asia than in oth
er
markets, and really only started in February. Chine
se
investors continued to buy into fast-growth stories
until
then, but a reappraisal has started there too. We e
xpect
the value trade to catch up further in the second q
uarter.
After the first wave boosted all value stocks, we e
xpect the
second wave to focus on ‘value with a future’, ie v
alue
companies with sustainable earnings growth ahead. G
iven
the polarization that we have seen in equity market
s over
the course of 2020, there are still attractively va
lued
opportunities to choose from.
Hong Kong and Singapore markets remain dependent on
re-openings and, with many Asian countries seeing v
ery
low case counts, we can expect some relief. However
, we
find little appeal in individual stocks. Our main o
verweight
position is in South Korea, where we now must monit
or
what the long-overdue lifting of the short-sale ban
in May
will do to retail sentiment, which has driven stock
s to
historically lofty multiples. In absolute terms, So
uth Korea
remains cheap with very high earnings growth
expectations.
Across Asia Pacific, we hold relatively large posit
ions in
Information Technology and Materials because we see
strong evidence of pricing power there.
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Start searching for ‘value with a future’
Emerging Markets Equities | Large-scale
vaccination programs should lead to re-opening
•
Vaccinations will help EM re-open in Q2
•
Key developments to watch in Q2 2021:
•
Later than expected, the EM worlds should reopen
•
Rising US bond yields mean EM may outperform DM
•
Earnings across EM will grow even faster than in Q1
Five-factor summary
Factors
Score
Macro
=
Earnings
+
Valuation
+
Technical
=
Sentiment
=
(
downgrade
from
positive
)
Total
TotalTotal
Total
+
++
+
Source: Robeco Emerging Markets Team
We maintain our constructive stance on emerging mar
kets
(EM)DM. As the table above shows, our earnings and
valuation factors remain positive, while our sentim
ent
factor has been downgraded from positive to neutral
, after
unprecedented consecutive inflows since October 202
0.
We have kept the technical factor neutral, given th
at
developed and emerging markets have risen roughly a
t the
same pace on a year-on-year basis. From March 2021,
emerging equity markets returned 47.8% in euros ver
sus
43.8% for developed markets.
Earnings revisions in emerging markets are in line
with
those in developed markets. The earnings revision r
atio for
EM has improved rapidly, and has already reached a
10-
year high. In addition, earnings per share (EPS) ar
e
expected to grow by 29% on average in EM in 2021, v
ersus
‘only’ 19% in DM. We therefore remain positive on t
he
earnings growth for EM.
We downgraded the sentiment factor from positive to
neutral, since we have seen unprecedented investmen
t
flows into EM of more than USD 120 billion since Oc
tober
2020. We expect inflows to continue, but at a slowe
r pace
than in the last two quarters. That said, the const
ructive
sentiment should persist, since investors are incre
asingly
looking for value propositions that will benefit fr
om a
reopening of the global economy.
China’s leading position in EM macro
The Chinese economy is on an expansion track, after
successful control of Covid-19. The strength of the
economy
is demonstrated by rising PPI and PMI indicators. C
hina is
also accelerating its vaccination campaign, aiming
for a
40% vaccination rate by July, following a slow star
t. We
expect economic policy normalization to continue an
d
credit growth to slow again, after a strong start i
n 2021,
especially as economic activities resume recovery i
n Q2.
Vaccination rollout and subsequent economic recover
y in
DM, led by the US, will also support China's export
momentum. External risks, such as rising inflation
expectations and the re-escalation of tensions betw
een
China versus the US and its allies remain significa
nt.
Furthermore, the PBoC will start winding down monet
ary
stimulus this year. Having said that, the stimulus
reduction
will be very gradual to ensure stability.
The early March National People's Congress (NPC) se
t a
rather conservative GDP growth target for 2021 of 6
% with
flexibility, and focused on longer-term goals, such
as
doubling the size of the economy by 2035. More impo
rtant
than the actual GDP target are other measures such
as the
debt level, carbon emissions and poverty reduction.
A
domestic credit tightening cycle, combined with the
US
recovery, could lead to inflationary concerns, whic
h could
compress valuation multiples.
Next to China, two other North Asian nations have e
xcelled
in terms of their handling of the pandemic and thei
r
economies: Taiwan and South Korea. Taiwan continued
to
outperform MSCI EM in the first quarter of 2021, af
ter a
very strong 2020. China and South Korea – also stro
ng
outperformers in 2020 – lagged the average slightly
in Q1
2021. Having said that, the outlook for all three c
ountries
remains positive versus the EM average, owing to th
eir
strong macroeconomic outlook and policies.
India and Southeast Asia continue to suffer severe
Covid-
19-related lockdowns. South Asian markets have been
far
less buoyant than their North Asian counterparts. I
ndian
equities achieved a small positive return in the fi
rst quarter
of 2021, but most Asean equity markets continue to
disappoint and lagged the average return.
In Latin America and EMEA, most equity markets reco
vered
from a dreadful 2020. Exceptions to this have been
Brazil
and Turkey, where political interference has led to
a
substantial underperformance for equity markets so
far
this year. In Brazil, president Bolsonaro replaced
the CEO of
Petrobras. Turkey’s president Erdogan did the same
with
his central bank governor. Political interference s
eems to
be a structural shortcoming in both countries, whic
h is the
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Start searching for ‘value with a future’
most important reason for our cautious stance towar
ds
their equity markets.
Inflation environment still benign
Inflation has been moving higher across some emergi
ng
countries. The pass-through from the currency
depreciations in 2020, rebounding commodity prices
and
disruptions in supply chains explain this developme
nt. Very
large liquidity injections and the adoption of
unconventional stimulus measures are potentially
inflationary in nature. Still, we expect inflation
in 2021 to
be roughly 2% in both emerging and developed market
s,
relatively stable on a year-on-year basis in EM and
on the
rise in DM, as illustrated in Figure 5.
Figure 5 | Inflation estimates
Source: MSCI, Robeco, March 2021
Monetary tightening in some EM countries
Despite a benign inflationary environment, monetary
policy stances are starting to diverge across emerg
ing
countries. The recent rise in US rates has added to
the
hawkish tilt of some EM central banks, particularly
for the
high-yielding economies. While we do not forecast b
road-
based monetary tightening across EM, Latin America
is
expected to lead the pack for the remainder of 2021
,
together with Turkey. Brazil is likely to hike rate
s further,
with its central bank expected to react more aggres
sively
to tighter global financial conditions and uncertai
nty over
the fiscal developments. Brazil has already increas
ed
interest rates from 2% to 2.75% in March 2021. Russ
ia
raised interest rates by 25 basis points (bps) in M
arch 2021,
and the now ex-governor of Turkey’s central bank
impressed foreign investors by hiking interest rate
s by 300
bps since the beginning of 2021. Meanwhile, other c
entral
banks in the large emerging countries are keeping r
ates
steady at the current low levels. It remains to be
seen how
hawkish they may eventually become in light of a re
latively
dovish US Federal Reserve.
Conclusion: we keep our bullish stance on North Asi
a
We keep a constructive view on EM macroeconomics in
general, and for North Asia in particular. This reg
ion could
see GDP growth numbers in the low single digits in
2021,
with large current account surpluses and relatively
low
fiscal deficits. Meanwhile, South Asia and most of
Latin
America and EMEA could see high single-digit GDP gr
owth,
resilient current account balances and fiscal defic
its close
to all-time highs. Fiscal and current account balan
ces are
likely to improve substantially as economies recove
r,
though. Figures 6 and 7 illustrate this backdrop.
Figure 6 | Budget balance estimates
Source: Bloomberg, Robeco, March 2021
Figure 7 | Current account estimates
Source: Bloomberg, Robeco, March 2021
On average, the current account balances of emergin
g
countries continue to look much better than those o
f their
developed counterparts. The same is true for fiscal
balances.
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Start searching for ‘value with a future’
Continued recovery in earnings expectations
The earnings revisions ratio for emerging markets r
eached
an all-time low in every region and every sector in
the
second quarter of 2020, but bounced back swiftly an
d
strongly, reaching decade-high levels, as Figure 8
and 9
show.
Figure 8 | Earnings revisions EM
Source: IBES, Robeco, March 2021
Figure 9 | Trends in earnings expectations EM
Source: BofA
In March, the one-month earnings revisions ratio fo
r EM
dropped from 1.33 to 1.19, as shown in Figure 9. F
rom a
longer-term perspective, this ratio is still close
to its highest
level in ten years.
Earnings revisions in EM have come down since our l
ast
quarterly, but are in line with those in DM. Also,
with the
much-stronger earnings growth expected in 2021 for
EM
(+29%) versus DM (+19%), we remain upbeat on the
earnings factor.
Figure 10 | Earnings revisions MSCI World Index
Source: IBES, Robeco, March 2021
Valuation a positive factor for emerging markets
Valuation remains a positive factor for EM in the n
ear term.
The 12-month forward P/E ratio approached a 10-year
low
in March 2020, but bounced back to much higher leve
ls,
as Figure 11 shows.
Figure 11 | EM valuation remains attractive
Source: MSCI, Robeco, March 2021
The average P/E ratio in emerging markets remains c
lose
to 15 times, compared to 21 times for MSCI World In
dex.
This translates into a 30% valuation discount for E
M
relative to DM. The average historical discount is
close to
20%. From a price-to-book perspective (P/BV), EM ar
e
trading at a 30% discount relative to DM. The avera
ge
historical discount is about 15%.
Technical picture neutral
Emerging equity markets have been performing roughl
y in
line with their developed counterparts over the las
t 12
months. EM slightly outperformed DM, therefore our
technical factor remains neutral for now.
Figure 12 | EM technicals are in line with DM count
erparts
Source: MSCI, Robeco, March 2021
Sentiment downgraded to neutral
We have downgraded the sentiment factor from positi
ve to
neutral, following the more than USD 120 billion of
cumulative inflows into emerging equity markets fun
ds
seen over the last two quarters. Inflows are expect
ed to
continue, albeit at a slower pace, as investors loo
k for
13 |
Start searching for ‘value with a future’
attractively-valued asset classes with high yields.
In an era
of reopening economies and large-scale vaccination
campaigns across the globe, global investors’ risk
appetite
might increase a bit further. Simultaneously, inves
tors
might seek more value for their portfolios.
Figure 13 | EM equity annual cumulative flows
Source: EPFR Global, March 2021
Implications for portfolio positioning
We maintain the value tilt in our Emerging Markets
Equity
Emerging Markets Equity Emerging Markets Equity
Emerging Markets Equity
portfolios
portfoliosportfolios
portfolios, which have a lower average P/E ratio th
an the
MSCI Emerging Markets Index. We still have an
underweight position in those countries that we bel
ieve
will be amongst the last ones to fully reopen. Mean
while,
we have an overweight position in countries that ha
ve
been least affected by the pandemic, namely North A
sia
(China, Taiwan and South Korea). During the last qu
arter,
we increased the portfolio weights in South Korea a
nd the
current portfolio is close to maximum overweight in
that
market. Although we took some profits in expensive
outperforming stocks in China and Taiwan, we have
maintained our overweight position in Taiwan. Withi
n the
rest of EM, we slightly increased our positions in
Brazil and
India, as we believe valuations in these two market
s now
reflect the full impact of the lockdowns on both th
e real
economy and corporate profits. In Brazil, we have a
larger
weight on exporters compared to the domestic econom
y
given a slower than expected macro recovery and the
increased political interference mentioned earlier.
In India,
equities are now priced for perfection, after robus
t
domestic and foreign investment flows. So far, it s
eems
earnings are coming through strongly, but we strugg
le to
find good investment ideas with upside. We have a s
light
overweight position.
From a sector perspective, we keep a comfortable
overweight position in Consumer Discretionary and
Information Technology. Meanwhile, we keep an
underweight position in the expensive Consumer Stap
les
sector. We also continue to have an overweight posi
tion in
Financials, since valuations have corrected the mos
t in this
sector following lockdowns and in some countries th
e
credit profile is better than initially expected.
In general, we remain confident in Chinese equities
, while
being cautious on external geopolitical risks. Afte
r the
March correction, valuation became attractive on a
relative
basis, especially for A shares, which have come dow
n to the
historical average level. Earnings revisions show p
ositive
signs of stabilizing and moving into an upward tren
d. The
continuing rise in PPI will also be positive for
manufacturing profits. Therefore, we expect the Chi
nese
market to be volatile but constructive in the secon
d quarter
of 2021. Generally speaking, we are positioning our
portfolios towards more value, by taking some profi
ts on
stocks with stretched valuations. We also focus on
earnings
upside momentum for our portfolio construction.
In our Chinese Equities portfolios
Chinese Equities portfoliosChinese Equities portfolios
Chinese Equities portfolios, we reduced our IT
exposure to an underweight position, and reduced ou
r
overweight position in consumer discretionary to a
neutral
weight. We added to Energy and Financials on earnin
gs
recovery potential, but remain underweight. We cont
inue
to add to Utilities on improving earnings outlook.
We also
reduced exposure to Industrials on the back of peak
ing
credit growth in China. Our positioning remains lar
gely
unchanged for other sectors, such as our overweight
position in Materials, and the neutral weight in co
nsumer
staples and telecommunications. Within each sector,
though, we have reduced expensive names and added t
o
companies with strong near-term growth visibility.
The Chinese A shares equities portfolio
Chinese A shares equities portfolioChinese A shares equities portfolio
Chinese A shares equities portfolio has kept an
overweight position in Consumer Discretionary, Mate
rials
and Industrials, which are mainly driven by domesti
c
demand and global recovery. We increased our
underweight in Consumer Staples by selling some hig
h-
valuation names, and have reduced our underweight i
n
Financials by adding to quality banks, as these ten
d to
feature attractive valuations and earnings upside.
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