Eurozone and Japanese equities set to see biggest earnings rebound in 2021, NN IP says

Eurozone and Japanese equities are the least expensive globally and are likely to see the biggest earnings rebounds in 2021, according to NN Investment Partners (NN IP) in its 2021 Outlook.

Ewout van Schaick

Eurozone and Japanese equities currently have equity risk premiums of 5.85% and 4.94% respectively, versus 3.25% in the US, 6.17% in the UK and 2.92% in China, NN IP analysis shows.

The European and Japanese markets are dominated by value and cyclical sectors, which should benefit the most from an economic rebound, while the more expensive growth-tilted technology and communication services sectors have a bigger weight in the US, NN IP says.

Corporate earnings globally are set to benefit from a pickup in demand, especially in the second half of the year. The reflation trade should also support the commodity markets, for example in the oil and industrial metals sectors, where after years of underinvestment, rising demand meets limited supply.

While monetary policy remains unchanged for the time being, yields are set to rise on the back of the inflation recovery, impacting bonds negatively, but NN IP is still positive on spreads in the credit and emerging market space as asset purchasing programmes and the search for yield continue.

Ewout van Schaick, Head of Multi Asset, NN Investment Partners, commented: “The consensus forecast for 2021 global earnings is for a strong 25% rebound, which would lift global earnings back to 2019 levels. Such a rebound would also make the recovery quicker than those that followed the two previous recessions, which is logical, as the current recession was event-driven and not caused by macro imbalances or financial stress.”

Marco Willner, Head of Investment Strategy, NN Investment Partners, added: “The US is more expensive than the other developed markets, mainly due to its overweight in growth-tilted technology and communication services sectors. Its economic downturn was also shallower than in Europe and Japan in the pandemic. Under most scenarios, prospects look best for non-US markets and for cyclical sectors, especially those offering climate-related solutions or active in service-related activities.

Marco Wilner

“How US-China relations evolve under President Joe Biden will be crucial for financial markets. For now, we expect a more diplomatic and constructive approach from Washington but not necessarily a change in concrete policies.”

Equities

The main driver of equity returns in 2021 will be an acceleration in earnings growth. Regional differences will be significant. Strongest earnings growth will be in Europe and Japan, and “weakest” growth will be in the US. Earnings in the more cyclical European and Japanese markets have declined much more sharply than the more tech-driven US market since the pandemic hit. Central banks’ reluctance to tighten monetary policy will support the equity risk premium, which is still attractive, especially outside the US. As such, double-digit returns are a real possibility in 2021.

In the US, the government and Federal Reserve support for the economy will be key this year. A new economic relief package is likely to be negotiated in the first half of 2021. Beyond this, the majority in the Senate after the Georgia elections will determine whether Biden will be able to implement some of his long-term initiatives in areas such as infrastructure and health care.

On equities, NN IP is moderately overweight global and Eurozone; neutral the UK, Japan and emerging markets (EMs); and moderately underweight the US.

Fixed income

Inflation may threaten bonds in 2021. For the past 30 years, globalisation has been driving disinflation but it was already stalling during the past decade, and the pandemic might reverse the trend outright. Authorities in almost all countries have aggressively eased both fiscal and monetary policy, which could generate inflation. The most attractive opportunities for 2021 will be in issuers whose spreads widened significantly in 2020 yet they still have sufficient liquidity to fund operations.

NN IP is moderately overweight US and Eurozone investment grade and EM hard currency bonds and significantly overweight US and Eurozone high yield credit.

Emerging markets

The outlook is positive for emerging market assets, driven by the post-pandemic global economic rebound, the solid performance of the Chinese economy and the continuation of the global search for yield. With the divergence between countries increasing, investors will find most opportunities in differentiating between countries and regions. In equities, the Asian region looks best positioned, while in debt, the high-yielding hard-currency frontier markets look more attractive.

ESG

Europe will lead the world this year in sustainable finance; spill-over effects will be felt across the developed world. Fixed income will start catching up with equities as green bond issuance picks up.

Private debt is also likely to play an even bigger role in acquisition finance, infrastructure, real estate and global trade finance in the coming years. Alternative credit could also offer investors an additional path to enhance returns and to strengthen their ESG commitment if the debt is positively linked to climate change, energy transition, the environment and sustainable growth.