How will the economies of China, the US and the EU go?
We expect solid economic growth in the US and Europe. The analysis by Rob Lovelace, vice president and president of Capital Group
Investments in the pandemic era have posed a whole new set of challenges. However, in some ways, the fundamentals have not changed. Corporate earnings continue to matter. There is a framework, which I like to use, which consists of three parts: pandemic, economy, markets. The pandemic will accompany us for some time, but its impact on the economy will diminish over time. This is the pattern we have observed. Furthermore, the health of the economy matters a lot to the bond market, but less so to the equity markets. The stock market is driven by the earnings of listed companies, and many companies also recorded positive performance during the COVID period. We should therefore assume that the pandemic has less impact on the economy. The latter continues to expand and companies are well positioned to thrive.
After the correction generated by COVID in the first quarter of 2020, stocks not only rallied but continued to expand in what we now realize is a bull market that has lasted for ten years. This was brought about by the same group of US tech stocks we usually call FAANG, namely Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet). This long-term trend persists. COVID stopped the climb, however it did not change the fundamental direction of the markets.
We expect solid economic growth in the US and Europe. Growth may be slower in China, but as we said earlier economies aren't necessarily the best indicators of stock market levels. Equity markets will perform well depending on the performance of the underlying companies. The key factor is corporate earnings growth.
For example, let's look at the US stock market, which has grown by over 16% annually over the past 10 years. This is a significant figure. Many people believe that it is due to the stimulus that has intervened in the market, so most of the increase was caused by a multiple expansion. But this aspect is only part of what generated it. The average compound growth rate of US corporate earnings was over 7% per annum. This means that roughly half of the growth is driven by earnings and the other half by investors who value these earnings higher.
Until recently, Chinese markets were growing at a similar pace to the United States, however, due to recent government announcements about common prosperity and state intervention in various sectors, the valuation metric was nearly halved. Furthermore, earnings growth in China was relatively modest. There are some fast growing companies but there are also many others in the real estate and banking sectors that have lost money, and therefore net profits have been almost unchanged.
So, if you look at the growth around the world, most of it is ultimately attributable to the United States, which is why this market has outpaced the others in the last decade. While we are seeing some excesses, what is happening in the US is unique and places our focus on opportunities in this market. At the same time, the lack of expansion of the valuation of Japanese companies justifies further analysis. And while the European and Chinese markets have been driven solely by valuation expansion, we are tracking many attractive companies at reasonable valuations behind the major benchmarks. As mentioned above, it is important to focus on companies rather than markets and seek opportunities regardless of a company's domicile.
Right now we see opportunities in companies with solid foundations, which are achieving high earnings, and not only in their strategic business areas, such as FAANG but also Tesla which we believe should join this group. We are also excited about the progress in the healthcare industry. Most COVID vaccines were created on the basis of the mRNA technology delivery system developed about 20 years ago, and is finally making its way into common drugs. This facility will be used to develop multiple new treatments and even cures for life-threatening diseases. It will change our life, so I am interested in a number of companies operating in this sector.
Furthermore, Europe and some of the emerging markets should not be excluded. They have learned from the United States and China and are creating their own centers of excellence, particularly in the technology sector. This is also evident in Canada. There are many companies like Shopify that build their own innovative platforms. They have exceptional products that they are bringing to market in the digital and meta realms.
Regarding the perspectives on environmental, social and governance (ESG) issues, we can say that the ESG principles are global and concern all asset classes. At Capital Group, we are committed to integrating ESG principles into our investment process. Then each stock is filtered based on ESG criteria. This factor is considered in our investment decisions because we know it will determine prices and results. Our role as bottom-up fundamental investors is to speak to companies. Companies want to do the right thing. They want better governance. They want to treat their workforce better. They want to have a minimal impact on the climate. And they ask us for guidance on these matters. We are aware of this responsibility, so we have created a solid ESG grassroots group that helps bring these issues to the fore. In addition, it is important to give asset managers the flexibility to evaluate companies from an ESG perspective, rather than simply banishing certain companies from a portfolio. ESG should not be viewed as a simple process of exclusion, but as identifying companies that are doing the right thing and supporting companies in transition.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/come-andranno-le-economie-di-cina-usa-e-ue/ on Sun, 06 Feb 2022 06:20:09 +0000.