There are several reasons why we think upward momentum on equity markets will continue. US growth is set to continue, Europe is recovering, both the ECB and BoJ are deploying ultra accommodating policy, large groups are once again looking to do deals and European company margins are expected to continue improving.
But index gains are likely to be slower than at the beginning of 2015 and the road ahead will be rocky due to persistent volatility over events like the Greek talks, Fed policy and the crisis between Russia and Ukraine. We are maintaining our preference for developed country equities, especially in Europe and Japan, as earnings upgrades are set to continue and likely to underpin equity market advances.
Absolute European valuations may look testing but they are not excessive in cyclically adjusted terms. And compared to bond markets, equities still look attractive. We prefer the Eurozone, cyclical and banks. Japanese equity valuations are not yet in expensive territory and recent regulatory developments and the resulting boost to ROE should provide additional support for equity prices.
In the US, however, valuations and historically high profit margins suggest we should be more cautious. We prefer financials and cyclicals. Financials are trading at attractive valuations and should gain from any Fed action while cyclicals, especially in the consumer sector, stand to benefit from lower unemployment and future wage increases.
Finally, we remain selective in emerging markets which remain just as disparate as far as fundamentals and valuations are concerned.
Philippe Uzan is CIO at Edmond de Rothschild Asset Management (France)