Heightened volatility rattles global markets, but the US economy shows no signs of weakening

So how did earnings expectations respond to the second-quarter pickup in volatility?

Heightened volatility rattles global markets, but the US economy shows no signs of weakening

Time to read: 3 min

For international markets, the second quarter of 2018 was marked by continued volatility. Quantitative tightening, balance sheet normalization, trade war concerns and political uncertainty all played a critical role in challenging the synchronized global growth we watched unfold last year. So how did earnings expectations respond over the past three months — and what did the pickup in volatility mean for our Earnings, Quality and Valuation (EQV) approach?

An EQV reflection on the global market

Earnings. In the first quarter of 2018, earnings expectations were being moderated for most areas outside of the US — partly due to a weaker dollar impact on European and Japanese company earnings, but also due to some signs of economic weakness in Europe and emerging markets (EM).

This trend continued in the second quarter, and at this point, the three-month earnings revisions ratio (the number of upgrades to downgrades) has been negative in all regions except the US (though we are also seeing a slowdown of earnings upgrades in the US).1

Having said that, we expect to see healthy earnings growth rates in all regions, with the MSCI USA Index expected to grow 14% for the next 12 months, compared to 13% in EM2, 12% in Europe3 and 11% in Asia ex-Japan.4 Still, given global market concerns, we expect actual earnings to fall short of expectations as is typical in most years.

An earnings shortfall could be supportive of the Invesco International Growth Fund’s investment approach, as our companies typically have a more sustainable earnings profile than the average company and are less dependent on upgrades due to valuation support.

Quality. From a quality perspective, there have been no major changes for the global markets, in our view. However, due to higher profits in 2018, returns are up and debt ratios have improved somewhat.

Valuation. In combination with sideways markets, the stronger earnings growth in 2018 help improved some of the near-term earnings metrics, as price-to-earnings ratios fell somewhat across the board.

However, the 10-year normalized price-to-earnings (P/E) ratio (also known as the Shiller P/E) is still at elevated levels, with the MSCI USA Index the most extended at 35x, a level that has only been topped during the tech bubble of the late 1990s.5

The discount for international markets versus the US on a Shiller P/E and a price-to-book (P/B) ratio is the highest recorded, dating back to 2003. Using the MSCI All Country World ex-US Index, the discount is 37% and 48%, respectively.

For Europe, the discount for the Shiller P/E and P/B is 37% and 44%, respectively. For EM, the discount is 44% and 48%, respectively.2 Finally, for Asia x-Japan, the discount is 45% and 48%, respectively.4

Challenges and opportunities abound

There appear to be some notable changes in the global market environment compared to previous years. Potentially the most important change is that central bankers are starting to normalize interest rates after a decade of having cut rates to record low levels. According to a study from the Bank of England, global interest rates were recently at a 5,000-year low.6 We’re also seeing a push to reduce central bank balance sheets by moving from quantitative easing to quantitative tightening. The Federal Reserve has been reducing its balance sheet, while the European Central Bank has been slowly tapering its asset purchases and is expected to end quantitative easing by the end of this year.

Many market observers would ascribe the changes in monetary policy as the catalyst for the pickup in volatility that started in late January 2018 and has continued through the second quarter. Higher volatility is likely to continue for the rest of the year and could provide opportunities for long-term investors like ourselves to find better entry points into quality growth stocks.

In 2017, the focus was on the start of synchronized global growth, with positive earnings revisions across all major regions. This has recently been challenged, as we’ve seen expectations of weakening growth in Europe and EM with positive earnings revisions fading. Currently, it’s unclear whether this is temporary or a more permanent change as the view is muddled by big swings in currencies, a 60% increase in oil prices over the last year, concerns over a potential trade war and political uncertainty in many key countries.

In contrast, the US economy has shown no sign of weakening, the US dollar reversed some of its losses from 2017 and US corporations have benefitted from significant tax cuts.

After a pause in the first quarter, the momentum trade came back in full force with US technology names leading the way as the NASDAQ 100 Index made a new high in the quarter. In fact, US technology companies’ total market cap of $6 trillion exceeds that of all companies in the eurozone at $5 trillion.6

See where the Invesco International and Global Growth team is finding opportunities around the world.

Read more blogs from the Invesco International and Global Growth team.


Data as of June 30, 2018, unless otherwise noted.

1 Source: Bank of America Merrill Lynch

2 Emerging markets represented by the MSCI Emerging Markets Index.

3 Europe represented by the MSCI Europe Index.

4 Asia ex-Japan represented by the MSCI All Country Asia Pacific ex-Japan Index.

5 Source: Invesco

6 Source: Bank of America Merrill Lynch, “The Biggest Pictures,” May 21, 2018

Important information

Blog header image: Daniel Fung/Shutterstock.com

Quantitative tightening is a monetary policy used by central banks to normalize balance sheets.

Quantitative easing (QE) is a monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective.

The Shiller price-earnings (P/E) ratio, also known as the cyclically adjusted P/E ratio, is a valuation measure calculated using real per-share earnings over a 10-year period.

Price-to-book (P/B) ratio is calculated by dividing the market price of a stock by the book value per share.

The MSCI USA Index measures the performance of the large- and mid-cap segments of the US market.

The MSCI All Country World ex-US Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets, excluding the US.

The MSCI Emerging Markets Index is an unmanaged index considered representative of stocks of developing countries.

The MSCI Europe Index is an unmanaged index considered representative of European stocks. The index is computed using the net return, which withholds applicable taxes for non-resident investors.

The MSCI All Country Asia Pacific ex-Japan Index is an unmanaged index considered representative of Pacific region stocks, excluding Japan.

The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial securities listed on the NASDAQ Stock Market based on market capitalization. An investment cannot be made into an index.

Clas G. Olsson
Senior Portfolio Manager, Managing Director 
CIO, International Growth Equity

Clas Olsson is Chief Investment Officer (CIO) and Senior Portfolio Manager with the Invesco International and Global Growth team. He also serves as a lead manager on the Invesco International Growth and Invesco European Growth strategies.

Mr. Olsson began his investment management career in 1994 as an investment officer and portfolio analyst specializing in international equities with Invesco. He was promoted to portfolio manager in 1997 and assumed his current role as senior portfolio manager in 1999 and CIO in 2009. Prior to joining Invesco, Mr. Olsson was a communications officer in the Royal Swedish Navy.

A native of Vasteras, Sweden, Mr. Olsson became a commissioned naval officer at the Royal Swedish Naval Academy in 1988 and earned a BBA degree in 1994 from The University of Texas at Austin.

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