Earnings hold the key
* The key to the outlook for global equities is earnings, with global valuations in line with
historical averages, a supportive monetary policy backdrop, and very bearish sentiment,
a major hit to EPS is the main risk for the market.
* There are two key issues in the EPS outlook – global GDP and the effect of lower oil
prices. With global GDP expected to remain above the key 2.6% threshold through
2016, global EPS should grow: we forecast 8.4% in 2016.
* The other uncertainty relates to oil. Analysts have slashed earnings estimates for oil
producers by $148bn but only raised forecasts for “oil consumers” by $9bn. This
asymmetry leaves scope for an oil “dividend” whatever happens to oil prices.
* History suggests that, if our earnings projections are right, today’s extremely negative
sentiment towards equities should unwind, with global equities able to recover the bulk
of their recent losses over time.
* Within the market we remain underweight in US equities, with our biggest
recommended overweight position in Europe ex-UK. We also overweight both Japanese
and EM equities.