INTERNATIONAL EQUITY
Chris Alderson
Head of International Equity
November 17, 2016
2017 Global Market Outlook Press Briefing
2
The Bull Market No One Loved
*Begins on March 9, 2009, which was the low point for the S&P 500 during the financial crisis.
Past performance cannot guarantee future results.
Sources: FactSet, Standard & Poor’s, and MSCI. Returns in USD.
+276%
+146%
+130%
+111%
100
150
200
250
300
350
2009 2010 2011 2012 2013 2014 2015 2016
Ind
ex
Le
ve
l (1
00
= 3
/9/2
00
9)
REGIONAL RETURNS
March 2009*–September 2016
S&P 500
MSCI Europe
MSCI Emerging Markets
MSCI Japan
“The Death of Equities?”
3
The Scarcity of Growth
As of September 30, 2016
Source: FactSet.
7.1 7.0 6.7
5.1
3.1 3.0
2.5
2.0
0.6
-1.2
-2.4
2.6
1.5 1.5 1.1
0.4
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Rea
l G
DP
Gro
wth
Yo
Y %
REAL GDP GROWTH
YEAR-OVER-YEAR (%)
-40
-20
0
20
40
60
80
100
120
140
2007 2008 2009 2010 2011 2012 2013 2014 2015
Emerging Markets Europe ex UK
Japan United Kingdom
United States
REGIONAL PROFITS (EPS IN USD) In USD Since Last Cycle Peak (October 2007)
4
The Hope for Growth
As of September 30, 2016
Sources: Ministry of Health, Labour & Welfare; Statistical Office of the European Communities; Bureau of Labor Statistics; Haver Analytics; and
Morgan Stanley Research.
-5
-4
-3
-2
-1
0
1
2
3
4
2004 2006 2008 2010 2012 2014
Ye
ar-
Ove
r-Y
ea
r %
Gro
wth
EMPLOYMENT GROWTH BY REGION
JapanEUUS
CORPORATE EARNINGS—WHERE NEXT?
Falling Rates
Rising Earnings
Higher Rates
Rising Earnings
Falling Rates
Falling Earnings
Higher Rates
Falling Earnings
MOST BULLISH
MOST BEARISH
?
5
Growth Motoring, Markets Rotating
As of September 30, 2016
Past performance cannot guarantee future results.
Sources: MSCI, total return indices used for MSCI Value and MSCI Growth. Source for MSCI data: MSCI. MSCI makes no express or implied warranties or
representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a
basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
80
100
120
140
160
180
200
220
240
197
6
197
8
198
0
198
2
198
4
198
6
198
8
199
0
199
2
199
4
199
6
199
8
200
0
200
2
200
4
200
6
200
8
201
0
201
2
201
4
MSCI WORLD VALUE—MSCI WORLD GROWTH
Total Return Indexed to 100
Value - Growth Mean -1 St Dev
-2 St Dev +1 St Dev + 2 St Dev
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
TOTAL RETURN (%)
Dec. 31, 2014‒Feb. 11, 2016
Feb. 16, 2016‒Sept. 30, 2016
6
Economic Inequality and the
Protest Vote
As of December 31, 2015
Sources: FactSet, Haver Analytics, Standard & Poor’s, Bureau of Economic Analysis, Federal Reserve Board, Tax Policy Center, Citizens for Tax Justice,
and T. Rowe Price.
*Equal-weighted total return of U.S. equities (S&P 500) and U.S. 10-year government bonds.
0%
5000%
10000%
15000%
20000%
25000%
30000%
40%
42%
44%
46%
48%
50%
52%
54%
1950 1960 1970 1980 1990 2000 2010
Cu
mu
lativ
e R
etu
rn
NA
ICS
U.S
. W
ag
es
as
% o
f G
DP
Wages as % of GDP
Equal-Wtd Equity and Bond Blend*
WALL STREET BOOM, MAIN STREET BUST
1950‒2015
BREXIT
7
Profits—U.S. Economy Versus
the S&P 500 Index
Sources: Deutsche Bank Research and Haver Analytics.
Service industries are: financials; multiline retail; specialty retail; Internet and
catalogue retail; diversified consumer services; hotels, restaurants, and
leisure; IT services; health care providers; and services.
86%
32%
14%
68%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Share of U.S. Employment Share of S&P 500 Earnings
THE U.S. ECONOMY VS.
THE S&P 500 INDEX
As of October 31, 2015
Service Industries Manufacturing/Goods Producing Industries
65%
43% 42%
34%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
200
8 Q
1
201
3 Q
2
201
3 Q
3
201
3 Q
4
201
4 Q
1
201
4 Q
2
201
4 Q
3
201
4 Q
4
201
5 Q
1
201
5 Q
2
201
5 Q
3
201
5 Q
4
201
6 Q
1
201
6 Q
2
201
6 Q
3 (
E)
201
6 Q
4 (
E)
201
7 Q
1 (
E)
201
7 Q
2 (
E)
201
7 Q
3 (
E)
201
7 Q
4 (
E)
Cu
mu
lati
ve
Gro
wth
in
Op
era
tin
g E
arn
ing
s P
er
Sh
are
EARNINGS GROWTH BY SECTOR
2013—2017E
S&P 500 Health Care and Information Technology
S&P 500 Financials and Utilities
S&P 500 Consumer Discretionary and Consumer Staples
S&P 500 Energy, Industrials, and Materials
20
13
Q1
8
Europe’s Pain
As of September 30, 2016
Past performance cannot guarantee future results.
Source: FactSet.
U.S. VS. EUROPEAN EQUITIES
RELATIVE PRICE PERFORMANCE (USD)
EUROPE AS A % OF WORLD MARKET
CAPITALIZATION
20%
22%
24%
26%
28%
30%
32%
34%
36%
38% MSCI Europe Market Cap Relative to World Market Cap
40
50
60
70
80
90
100
110
120
130
196
9
197
2
197
5
197
8
198
1
198
4
198
7
199
0
199
3
199
6
199
9
200
2
200
5
200
8
201
1
201
4
S&P Minus Europe
Mean
-1 St Dev
+1 St Dev
9
European Profits—Why so Bad?
Chart is shown for illustrative purposes only and does not represent the performance of any specific security.
Sources: FactSet and MSCI.
-26.4
%
-13.4
%
-11.6
%
-6.8
% -3
.0%
0.4
%
1.4
%
1.9
%
2.4
%
3.3
%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
MSCI EU: CONTRIBUTION TO
EARNINGS CHANGE BY SECTOR
October 2008 to August 2016
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
Oct-
08
Ap
r-09
Oct-
09
Ap
r-10
Oct-
10
Ap
r-11
Oct-
11
Ap
r-12
Oct-
12
Ap
r-13
Oct-
13
Ap
r-14
Oct-
14
Ap
r-15
Oct-
15
Ap
r-16
MSCI EU INDEX: PERCENT OF EARNINGS
FROM ENERGY, MATERIALS, AND FINANCIALS
October 2008‒August 2016
Energy
Materials
Financials60%
18%
10
0
2
4
6
8
10
12
14
16
18
20
22
Ye
n (
Tri
llio
n)
FY
TOTAL SHAREHOLDER RETURNS
OF ALL LISTED COMPANIES
On a Common Stock Basis 1990‒2017 (Est. for 2016‒2017)
Dividends
Share Buybacks
Japan—What Is Changing
As of July 31, 2016
Past performance cannot guarantee future results.
Sources: Corporate Reports, Japan Exchange Group, and Empirical Research Partners Analysis.
Data exclude financials and utilities. Share buybacks are net of share issuance.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1stSection
2ndSection
Mothers JASDAQ Total JPX-Nikkei400
JAPANESE SHARE OF STOCKS
WITH INDEPENDENT DIRECTORS
BY LISTING CATEGORY
2014
2015
11
China—A Hard Landing Within a
Soft Landing
As of September 30, 2016
Sources: FactSet, Haver Analytics, and China National Bureau of Statistics.
4
6
8
10
12
14
16
Ye
ar-
Ove
r-Y
ea
r %
Ch
an
ge
CHINA: REAL GDP GROWTH
January 2005–June 2016
51%
30%
35%
40%
45%
50%
55%
Se
rvic
es
as
% o
f G
DP
CHINA: SERVICES SHARE OF THE ECONOMY
1992‒2Q16
12
Emerging Markets—Rates Down as
Inflation Abates
Sources: Various National Statistical Agencies, Haver Analytics, and T. Rowe Price.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2010 2011 2012 2013 2014 2015 2016
Ye
ar-
Ove
r-Y
ea
r %
Ch
an
ge
EMERGING MARKET INFLATION
January 2010–August 2016
India
Brazil
China
Russia
0%
02%
04%
06%
08%
10%
12%
14%
16%
18%
20%
2010 2011 2012 2013 2014 2015 2016
EMERGING MARKETS
CENTRAL BANK RATES
January 2010–September 2016
India
Brazil
China
Russia
13
Emerging Markets: Uncertainty and
Opportunity
Sources: FactSet and Empirical Research Partners Analysis.
Top quintile compared with sector average.
VALUATIONS REFLECT CHANGE
AND UNCERTAINTY 12-Month Forward P/E as of September 30, 2016
0 5 10 15 20
Mexico
India
Philippines
U.S.A.
Indonesia
Malaysia
The World Index
Chile
Europe
South Africa
Thailand
Taiwan
Japan
Brazil
Czech Republic
Peru
Greece
China
Qatar
United Arab Emirates
Colombia
Poland
Hungary
Egypt
South Korea
Turkey
Russia
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Sta
nd
ard
Devia
tio
n
EMERGING MARKETS VALUATION SPREADS
The Top Quintile Compared With the Market Average January 1992‒September 2016
Valuation Spread
1 Standard Deviation
-1 Standard Deviation
One Standard
Deviation
Average
NARROW
DISPARITIES
WIDE
DISPARITIES
14
Multiples Have Expanded, but Extremes
(or Crises) End a Cycle
As of September 30, 2016
Past performance is not a reliable indicator of future performance.
Sources: FactSet and MSCI. Source for MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever
with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial
products. This report is not approved, reviewed, or produced by MSCI.
5
7
9
11
13
15
17
19
21
23
25
27
29
Pri
ce
-to
-Ea
rnin
gs
Rati
o
DEVELOPED VS. EMERGING MARKETS
12-Month Forward P/E January 1996–September 2016
MSCI World
LT AVERAGE
MSCI EM
LT AVERAGE
MSCI World Long-
Term Average
16.2x
MSCI EM Long-
Term Average
11.8x
0
10
20
30
40
50
60
70
80
90
100
1993 1996 1999 2002 2005 2008 2011 2014
P/E
NT
M/I
mp
lie
d P
/E
EQUITY AND BOND VALUATIONS
July 1993–September 2016
US Treasury 10 Year 1/Yield
German Bund 10 Year 1/Yield
S&P 500
Japan TOPIX
MSCI Germany
Maximum
Value 714
15
Global Equities: A Fork in the Road
As of September 30, 2016
Equity market sentiment has become increasingly divided as the bull
market has matured. This is an opportunity for the well-informed stock
picker but implies rising market risks.
China and the energy sector are experiencing major structural change,
adding to the natural bouts of volatility created by an equity market thesis
that is in transition.
Reasonable valuations, modest global profit growth, and cash-rich balance
sheets should provide support to global equities. It is important to temper
return expectations, however.
Emerging market equity fundamentals are as dispersed as ever and
selectivity is critical. Emerging market-listed stocks delivering long-term
growth should regain/retain a premium in a lower-growth world.
Political uncertainty and popular protest have become mainstream as
economic inequality is being called into question. Fiscal stimulus is one
potential outcome.
16
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Past performance cannot guarantee future results.
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