Equity markets have been enjoying a strong year so far. Performance was primarily driven by valuations as investors were anticipating a rebound in earnings. In 2014, earnings will have to deliver and take over as key market driver. INg IM expects this to happen and foresee returns in line with earnings growth.
The biggest risk resides in emerging markets (EM). Since the taper-talk some adverse dynamics have started to develop in EM.
Earnings growth estimates and index targets
Strong year for equities
Barring a nasty unexpected event, 2013 will be a banner year for developed market equities. Year-to-date developed market equities rose by almost 20%. Despite many event risks (Cyprus, Syria, debt ceiling, US government shutdown, political scandals, German elections…) we had only one meaningful correction this year, caused by the ‘taper-talk’ of Fed Chairman Bernanke in May. However, the reversal was swift and all other hurdles represented merely wrinkles in market performance. In fact, the hurdles represented an excellent buying opportunity.
An interesting observation is that the performance was primarily driven by higher valuations. Global earnings rose a mere 2.5%. This pattern is not strange in turning points of the business cycle as investors anticipate a rebound in earnings even when trailing earnings still decline.
As the equity cycle progresses, earnings will have to deliver and eventually take over as the main driver of market performance. We have good hopes this will happen in 2014.
You can read the full report on the attached document.