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Global Market
Outlook
Michelle Gibley, CFA
Charles Schwab & Co., Inc.
April 2017
Join the social media
conversation #cofpa17
Uncertainty high
Source: The GEPU (Global Economic Policy Uncertainty) Index is a PPP-adjusted (purchasing power adjustment) GDP-weighted average of national EPU indices for 16 countries:
Australia, Brazil, Canada, China, France, Germany, India, Ireland, Italy, Japan, Russia, S. Korea, Spain, U.K. and U.S. Each national EPU index reflects the relative frequency of owncountry newspaper articles that contain a trio of terms pertaining to the economy (E), policy (P) and uncertainty (U). Source: FactSet, "Measuring Economic Policy Uncertainty"
by Scott Baker, Nicholas Bloom and Steven J. Davis, www.PolicyUncertainty.com. As of 2/28/2017.
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Charles Schwab
Yet sentiment is also elevated
Consumer Confidence Index - United States
NFIB Small Business Optimism Index - United States
Ifo Business Climate Index - Germany
Business Sentiment Index - France
120
100
80
60
40
20
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: FactSet, Conference Board, National Federation of Independent Business, Ifo National Institute of Research, Bank of France, as of 3/29/2017.
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It’s the
Economy!
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It’s the economy…
Stocks tracking better than expected data
MSCI ACWI - Index (year-over-year % change) (Left)
Citigroup Economic Surprise Index for G10 countries (Right)
30
60
25
50
20
40
15
30
10
20
5
10
0
-5
0
-10
-10
-15
Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17Mar-17
-20
Source: Bloomberg data as of 3/29/2017.
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It’s the economy…
Global growth turnaround
Global Leading Indicator - (index monthly change)
0.15
0.10
Rising
for 12
straight
months
0.05
0.00
- 0.05
- 0.10
- 0.15
2013
2014
2015
2016
2017
Source: FactSet, OECD, as of 4/11/2017. *Index is OECD plus Major Non-member Economies (Brazil, China, India, Indonesia, Russia, and S. Africa).
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Charles Schwab
It’s the economy…
Global growth may be accelerating
Global Composite PMI (Index)
Global Services PMI (Index)
Global Manufacturing PMI (Index)
56
55
54
53
52
51
50
49
Jan- 13
Jan- 14
Jan- 15
Jan- 16
Source: FactSet, Markit Economics, as of 4/5/2017.
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It’s the economy…
Eurozone surprising naysayers
Eurozone Composite PMI (Index)
Eurozone Services PMI (Index)
Eurozone Manufacturing PMI (Index)
58
56
54
52
50
48
46
44
Jan- 13
Jan- 14
Jan- 15
Jan- 16
Source: FactSet, Markit Economics, as of 4/5/2017.
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It’s the economy…
Emerging Markets have benefitted from global growth upturn
Emerging Market Composite PMI (Index)
Emerging Market Services PMI (Index)
Emerging Market Manufacturing PMI (Index)
54
53
52
51
50
49
48
Apr- 14 Jul- 14 Oct- 14 Jan- 15 Apr- 15 Jul- 15 Oct- 15 Jan- 16 Apr- 16 Jul- 16 Oct- 16 Jan- 17
Source: FactSet, Markit Economics, as of 3/29/2017.
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Charles Schwab
It’s the economy…
Pricing power return stabilizing China’s GDP
Producer price index, year-over-year % change - China (Left)
Nominal GDP, year-over-year % change - China (Right)
20
30
15
25
10
20
5
15
0
10
-5
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
5
Source: Charles Schwab, FactSet, China National Bureau of Statistics, 3/29/2017.
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It’s the economy…
Price improvements boosting Chinese corporate profits
Industrial profits - China (year-over-year % change) (Left)
PPI - China (year-over-year % change) (Right)
35
10
30
8
25
6
20
4
15
2
10
0
5
-2
0
-4
-5
-6
-10
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
-8
Source: Charles Schwab, FactSet, China National Bureau of Statistics, 3/29/2017.
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Monetary
vs.
Fiscal Stimulus
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Charles Schwab
Monetary policy divergence
Source: FactSet., BoJ=Bank of Japan. ECB=European Central Bank, as of 02/28/2017.
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Monetary policy divergence boosted dollar
Source: FactSet, as of 3/21/2017.
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Monetary policy no longer only game in town
Source: Schwab Center for Financial Research.
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Tax cuts could boost S&P 500 EPS
Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2017(c) Ned Davis Research, Inc. All rights reserved.).
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Sales and
Earnings could
expand
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Deflation threat has subsided
CPI - Japan (year-over-year % change)
CPI - Eurozone (year-over-year % change)
CPI - U.S. (year-over-year % change)
6
5
4
3
2
1
0
-1
-2
-3
-4
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: FactSet, U.S. Dept. of Labor, Eurostat, Japan Ministry of Internal Affairs and Communications, as of 4/11/2017.
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Nominal growth may return to 20-yr average
Source: Charles Schwab, Bloomberg data as of 2/8/2017.
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Faster nominal growth could boost sales
Source: Charles Schwab, Bloomberg IMF data as of 11/18/2016. Nominal GDP for 2016 and 2017 are IMF forecasts from the October 2016 World Economic Outlook
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Bank stocks globally following yield curves
STOXX Europe 600 Banks - (Index) (Left)
Yield curve (German government 10 yr less 2 yr yield)
Correlation: 0.90
(Right)
200
1.40
190
1.30
1.20
180
1.10
170
1.00
160
0.90
150
0.80
140
0.70
130
0.60
120
0.50
110
Jan-16
Apr-16
Jul-16
Oct-16
0.40
Jan-17
Japan Nikkei Banks - Price Index (Left)
Yield curve (Japanese go vernment 10 yr less 2 yr yield) - Japan (Right)
Correlation: 0.87
2,000
0.45
1,900
0.40
1,800
0.35
1,700
0.30
1,600
0.25
1,500
0.20
1,400
0.15
1,300
0.10
1,200
0.05
1,100
1,000
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Jan-16
Apr-16
Jul-16
Oct-16
Source: FactSet, Deutsche Bundesbank, Japan Ministry of Finance, as of 3/29/2017.
Jan-17
0.00
Charles Schwab
Earnings expected to rebound
Source: Ned Davis, MSCI, consensus forecasts as of 4/3/2017. MSCI EAFE Index = Developed international, MSCI EM index = EM.
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Charles Schwab
Returns can attract money
Source: Charles Schwab, Bloomberg data as of 3/21/2017.
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Trade may
surprise
positively
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The value of trade has fallen…
IMF World Export Value of Goods (billions US dollars)
$1,700
$1,600
$1,500
$1,400
$1,300
$1,200
$1,100
$1,000
$900
$800
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: FactSet, International Monetary Fund, as of 3/29/2017.
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But trade volume hit a record high
IMF World Export Value of Goods (billions US dollars) (Left)
CPB World Export Volume (index) (Right)
$1,800
120
$1,600
110
$1,400
100
$1,200
90
$1,000
80
$800
70
$600
$400
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
60
Source: FactSet, International Monetary Fund, Netherlands Central Planning Bureau, as of 3/29/2017.
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Trade may surprise naysayers in 2017
Source: FactSet, International Monetary Fund, as of 3/29/2017.
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Protectionist rhetoric may be unrealized
Source: Charles Schwab, IMF data as of 12/02/2016. *Year 2017 is an IMF forecast of the annual rate based on most recent data available.
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Volatility may
return
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Charles Schwab
European elections pose a risk
Date
Country
What’s at stake
April 23 and May France
7, 2017
The Presidential race is up for grabs. The far-right National Front (FN)
party’s candidate, Marine Le Pen, supports exiting the EU and euro.
Main contenders: Macron (centrist), Fillon (right), Hamon (left), and
Melenchon (far left).
Sept. 24, 2017
While Merkel’s popularity has fallen and the anti-immigration
Alternative for Germany (AfD) party gained some parliamentary
seats last year, a mainstream coalition is likely to prevail.
Germany
Mid-to-late 2017 Italy
possible
Elections aren’t due until 2018, but the current government is
unstable. The anti-euro Five Star Movement (M5S) polls close to the
ruling Democratic Party (PD).
Source: Charles Schwab, as of 4/11/2017.
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Stocks have slid ahead of key votes
Source: Charles Schwab, Bloomberg data as of 3/27/2017.
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Brexit: UK faltered after entering EU in 1973
Source: Charles Schwab, UK Office for National Statistics data as of 3/29/2017.
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Brexit: consumers currently pulling back
Source: Charles Schwab, UK Office for National Statistics data as of 3/29/2017.
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As good as it gets?
Difficult to surprise when bar is high
MSCI ACWI - Index (year-over-year % change) (Left)
Citigroup Economic Surprise Index for G10 countries (Right)
30
60
25
50
20
40
15
30
10
20
5
10
0
-5
0
-10
-10
-15
Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17Mar-17
-20
Source: Bloomberg data as of 3/29/2017.
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Charles Schwab
Where in the
world do we
favor most?
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Charles Schwab
Where to invest?
Japan tends to perform like the financial sector
Source: Charles Schwab, MSCI data as of 1/12/2017.
Past performance is no guarantee of future results. Indexes measure cumulative total return in US dollars since start of 2006.
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Charles Schwab
Where to invest?
Canada tends to act like the energy sector
Source: Charles Schwab, MSCI data as of 1/12/2017.
Past performance is no guarantee of future results. Indexes measure cumulative total return in US dollars since start of 1999.
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Charles Schwab
Where to invest?
The U.S. tends to act like the technology sector
Source: Charles Schwab, MSCI data as of 1/12/2017.
Past performance is no guarantee of future results. Indexes measure cumulative total return in US dollars since start of 2006.
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Charles Schwab
Where to invest?
Emerging market cycle
Source: Charles Schwab, MSCI data as of 1/12/2017. Emerging Market stocks = MSCI Emerging Market Index, Developed Market stocks = MSCI World Index.
Past performance is no guarantee of future results.
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Can EM decouple from the dollar?
MSCI Emerging Markets - Price Index (Left)
Broad Trade-Weighted Dollar Index - Inverse (Right)
Correlation: -0.73
1,150
95
1,100
100
1,050
105
1,000
110
950
900
115
850
120
800
125
750
130
700
650
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
135
Source: FactSet, MSCI, as of 3/29/2017.
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Key takeaways on our outlook
▪
It’s the economy!
▪
Sales and earnings likely rebounding
▪
Volatility could return
▪
Sectors can outweigh country of origin in international
performance
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Questions?
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Thank you
Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or
personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an
investment strategy for his or her own particular situation before making any investment decision.
We believe the information obtained from third-party sources to be reliable, but neither Schwab nor its affiliates guarantee its accuracy, timeliness,
or completeness. Opinions and estimates herein are as of the date of the material and are subject to change without notice at any time in reaction
to shifting market conditions.
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, political
instability, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.
Investing in sectors may involve a greater degree of risk than investments with broader diversification.
Indexes are unmanaged, do not incur fees or expenses and cannot be invested in directly.
Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of
an offer to buy any security. Supporting documentation for any claims or statistical information is available upon request.
Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.
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Charles Schwab
Definitions
The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data
surprises (actual releases vs Bloomberg survey median).
Consumer Confidence Index is an index that measures consumer confidence.
Consumer Price Index (CPI) is an index that measures the weighted average of prices of a basket of consumer goods and services, weighted according to their importance.
France Business Sentiment Index is a survey of 4,000 businesses in industry. Indicator normalized around 100.
The GEPU (Global Economic Policy Uncertainty) Index is a PPP-adjusted (purchasing power adjustment) GDP-weighted average of national EPU indices for 16 countries:
Australia, Brazil, Canada, China, France, Germany, India, Ireland, Italy, Japan, Russia, S. Korea, Spain, U.K. and U.S. Each national EPU index reflects the relative frequency of owncountry newspaper articles that contain a trio of terms pertaining to the economy (E), policy (P) and uncertainty (U).
Global Leading Economic Index (Global Leading Indicators) is an index that is a composite average of leading indicators and is designed to signal peaks and troughs in the
business cycle.
The Global PMI is an economic indicator measuring business conditions in 32 of the world’s top economies accounting for over 85% of global GDP. It reflects changes in global
output, employment, new business orders, backlogs and prices. Composite index includes the manufacturing sector and services sector.
Gross Domestic Product (GDP) is a quarterly report released by the U.S. Bureau of Economic Analysis that is an aggregate measure of total economic production for a
country, representing the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases,
private inventories, paid-in construction costs and the foreign trade balance (exports are added, imports are subtracted).
Ifo Business Climate Index is a leading indicator for economic activity in Germany.
The National Federation of Independent Business (NFIB) Small Business Optimism Index is compiled monthly by surveying its members on the following 10 issues: outlook for
expansion, outlook for business conditions six months from now, actual earnings changes over the past three months versus the prior three months, job openings, hiring plans,
sales expectations, expected credit conditions, inventory satisfaction, inventory plans and capital expenditure plans.
Producer Price Index (PPI) is an index that measures the weighted average of prices in the selling prices received by domestic producers for their output.
The Purchasing Managers Index (PMI) is an economic indicator measuring business conditions in either manufacturing, services, or both (composite) sectors, and is based on
five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The purpose of the PMI is to provide information about
current business conditions to company decision makers, analysts and purchasing managers.
Trade Weighted U.S. Dollar Index is a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.
Broad currency index includes the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand,
Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile and Colombia.
The U.S. Dollar Index is a measure of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies
which include the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc.
The Yield Curve is the spread or difference between long term and short term interest rates.
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Charles Schwab
Definitions
The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries*. With 2,484 constituents, the index covers approximately
85% of the global investable equity opportunity set.
The MSCI Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets (EM) countries*. With 832 constituents, the index covers approximately 85% of the free
float-adjusted market capitalization in each country.
The MSCI Canada Index is designed to measure the performance of the large and mid cap segments of the Canada market. With 93 constituents, the index covers approximately 85% of the free
float-adjusted market capitalization in Canada.
The MSCI France Index is designed to measure the performance of the large and mid cap segments of the French market. With 76 constituents, the index covers about 85% of the equity universe in
France.
The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese markets. With 314 constituents, the index covers approximately 85% of the free
float-adjusted market capitalization in Japan.
The MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market. With 110 constituents, the index covers approximately 85% of the
free float-adjusted market capitalization in the UK.
The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. With 622 constituents, the index covers approximately 85% of the free floatadjusted market capitalization in the US.
The MSCI World Index captures large and mid cap representation across 23 Developed Markets (DM) countries*. With 1,634 constituents, the index covers approximately 85% of the free floatadjusted market capitalization in each country.
The MSCI World Energy Index is designed to capture the large and mid cap segments across 23 Developed Markets (DM) countries. All securities in the index are classified in the Energy sector as
per the Global Industry Classification Standard (GICS®).
The MSCI World Financials Index is designed to capture the large and mid cap segments across 23 Developed Markets (DM) countries. All securities in the index are classified in the Financials
sector as per the Global Industry Classification Standard (GICS®).
The MSCI World Information Technology Index is designed to capture the large and mid cap segments across 23 Developed Markets (DM) countries. All securities in the index are classified in the
Information Technology sector as per the Global Industry Classification Standard (GICS®).
The S&P 500 Composite Index is a market capitalization-weighted index of 500 of the most widely-held U.S. companies in the industrial, transportation, utility, and financial sectors.
The STOXX Europe 600 Banks Index is an index derived from the STOXX Europe 600, which tracks 600 publicly-traded companies representing large mid and small cap companies across 17
countries of the European region, and is designed to track the European banking sector.
The Nikkei Banks Index is an index derived from the Nikkei 255, which is a price weighted index of the top-rated 225 Japanese companies listed in the First Section of the Tokyo Stock exchange, and
is designed to track the Japanese banking sector.
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Charles Schwab