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Our US Equity Strategy team has been gradually shifting its sector exposure from domestic to more globally-oriented firms, and recently upgraded the S&P Materials sector to overweight. Several bullish signals underpin the upgrade, including BCA’s leading economic indicator for Asia, EM currency strength, and the fact that EM policy rates are now in a clear downtrend. Europe represents another important reason why investors should expect globally-sourced earnings to recover this year. European-sourced revenue will continue to be a very important component of overseas profits.
True, the underlying structural problems that caused the euro area sovereign debt crisis have not been fully resolved. But the announcement of the ECB’s OMT plan in early September clearly and durably eased European financial market stress (investor confidence is becoming more upbeat as indicated in the latest ZEW survey).
Reduced financial stress is highly likely to support European growth this year barring a full-blown re-emergence of the crisis (which we do not expect), even if the level of real GDP growth is subpar.
The bottom line is that globally-sourced earnings growth should accelerate this year due to a combination of a sustainable rebound in China and the ECB’s apparently successful prevention of another financial market riot.