As we ring in a new year, it’s a good time to gain some perspective on where we’ve been, and where we might be headed. Norm Boersma, CFA, chief investment officer of Templeton Global Equity Group, takes a look at the current headwinds facing the global equity markets, from fiscal imbalances to growth challenges—and how market uncertainty can result in market mispricings.
TEMPLETON GLOBAL EQUITY GROUP
Norman J. Boersma, CFA, Chief Investment Officer
Equities generally climbed a wall of worry in 2012, but considerable uncertainty remains given a combination of fiscal imbalances and growth challenges in many parts of the world. Near year-end, with the majority of central banks in the G20 (which consists of 19 developed and emerging countries as well as the European Union) implementing extraordinarily loose monetary policies, and countries representing roughly half of global GDP running substantial budget deficits, scope for both monetary and fiscal stimulus may be limited. In an era of slowing global economic growth, we believe the ability to find stocks with the potential to perform well regardless of macroeconomic adversity will become increasingly valuable.
This does not mean that economic growth is certain to slow in 2013, though it does suggest that conditions may be less conducive to above-trend growth. Yet, it is important to realize that economic growth and equity returns are not necessarily correlated. For example, Europe, which recently entered its second recession in four years, significantly outperformed many higher-growth markets in 2012. Much more important than economic growth rates for investors, in our view, is finding where the market errs in its perception of value.
The late Sir John Templeton understood this, telling clients in 1994, “Too many investors focus on outlook and trend. Therefore, more profit is made by focusing on value.” We believe Europe can continue to offer compelling value, with the region as a whole still trading at a significant discount to historic average multiples near year-end, according to our analysis. Europe made significant progress with systemic stabilization in 2012, and we think policy should remain supportive for the simple reason that the costs of a break-up still exceed the costs of holding the region together. Select potential values have also emerged in Asia and North America. In general, Templeton’s opportunity set has broadened across regions, sectors and styles in recent quarters as valuation spreads narrowed, making this potentially a stock-picker’s market.
Despite generally supportive market trends and recent performance improvements, much uncertainty remains. Can the U.S. avoid a growth-sapping fiscal contraction? Can China engineer a soft landing? Will the eurozone flourish or languish? Will hostilities in the Middle East calm down or flare up? Such high levels of uncertainty have kept valuations interesting at a time when corporate fundamentals have generally been strong and significant progress has been made toward systemic stabilization. Given the current combination of strong fundamentals and weak expectations, we believe that considerable opportunities remain for investors with patience, fortitude and the ability to look past short-term market movements.
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