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Global Strategy Summary

Core Content

This document outlines the current relative value opportunities in global equities based on the Equity Risk Premium (ERP) model. The model incorporates macroeconomic regimes and adjusts for balance sheet quality and sensitivity to real rates to forecast returns across countries, sectors, and investment styles.

Main Points

• ERP Predictive Power: ERP has strong predictive power for equity performance, and the model considers the current business cycle stage, rate levels, and earning yields.

• Forecasting Model: The model separates returns into an "alpha" component (earnings growth potential) and a "beta" component (valuation), with the latter adjusted for balance sheet quality and real rate sensitivity.

• Country Indices:

  • The S&P500 expected total returns have slightly improved from 6.1% to 7.2% pa, but remain below the average realized returns.
  • China has been downgraded from overweight to neutral due to a significant drop in ERP from 10.1% to 7.2% over the last 12 months.
  • EU screens favorably among the most attractive developed markets (DM).
  • Japan is also seen as attractive, though this may change with forward rate pricing.
  • Within emerging markets (EM), Taiwan has the highest expected returns at 12.4% pa, driven by low real rates.
  • The US, Australia, and India are considered expensive, while Japan, UK, South Africa, South Korea, Mexico, and Brazil are seen as attractive.
  • Real yields affect the valuation picture, with some countries like Mexico and Spain moving down in rankings, while Eurozone and Canada moving up.

• Sectors:

  • EU Consumer Discretionary is expected to outperform US Consumer Discretionary.
  • EU Utilities are expected to outperform US Utilities.
  • US Info Tech is expected to outperform EU Info Tech.
  • High-conviction stocks with exposure to these relative value opportunities are listed for each sector.

• Investment Styles:

  • Growth and Value are expected to outperform Low Volatility.
  • US and EM Growth are favored over EU Low Volatility.
  • US Low Volatility is expected to underperform Growth and Value.
  • A list of high-conviction stocks with potential price appreciation or depreciation is provided for each style.

Key Information

• Expected Returns:

  • The projected 5-year annualized total returns for the S&P500 are 7.2% pa.
  • These returns are expected to drop to around 4.6% pa when considering future real rate paths.
  • The lowest projected returns are for Spain at 3.7% pa, and the highest for Taiwan at 12.4% pa.

• Valuation Metrics:

  • Developed market indices are fairly valued today.
  • Emerging market indices are slightly attractive compared to their own historical levels.
  • Z-scores for valuations show a deterioration over the last 3 years, with negative values indicating overvaluation.

• Model Adjustments:

  • ERP-based model considers both current and future real rates.
  • Forward pricing of real rates could significantly impact the expected returns, especially for the US.

Relative Value Opportunities

Country Indices

Sectors

• Consumer Discretionary:

  • EU over US: EU expected 12.9% vs. US 4.0%.
  • EU names with potential price appreciation: Prosus, Whitbread, SEB, Delivery Hero, Easyjet, Allegro, Continental.
  • US names with potential price depreciation: Dillard's, Macy's, Tesla, Rivian, Palantir, Lululemon, Atlassian.

• Utilities:

  • EU over US: EU expected 8.3% vs. US 4.1%.
  • EU names with potential price appreciation: Orsted, Rwe, Pennon Group, Enel, SSE, EDP, Veolia.
  • US names with potential price depreciation: American Electric Power, Wec Energy, Atmos Energy, Ppl, Firstenergy, Exelon, Consolidated Edison.

• Information Technology:

  • US over EU: US expected 13.5% vs. EU 7.2%.
  • US names with potential price appreciation: First Solar, Zebra Tech, Dell, Nvidia, AMD, Gen Digital, Oracle.
  • EU names with potential price depreciation: Ericsson, Temenos, Softcat, Auto Trader, Bechtle, Scout24, Aixtron.

Styles

• Growth & Value over Low Volatility:
  • US and EM Growth are favored over EU Low Volatility.
  • US Growth names with potential price appreciation: Moderna, Bio-Techne, Marvell Tech, Draftkings, Burlington Stores, Block, Zebra Tech.
  • EM Growth names with potential price depreciation: Banco Santander Chile, Zhejiang Leapmotor, Cez, Srf, Nongfu Spring, Smoore International, Bosch.
  • EU Growth names with potential price depreciation: Siemens Energy, Temenos, Auto Trader, Eqt, Puma, Unilever, Sandvik.
  • US Low Volatility names with potential price depreciation: IBM, American Electric Power, Wec Energy, Kroger, Gilead Sciences, Occidental Petroleum, General Mills.
  • EU Low Volatility names with potential price depreciation: Bt Group, Ericsson, Fortum Oyi, Unilever, Severn Trent, Swiss Prime Site, Svenska Handelsbanken.

Asset Implications

• The ERP model suggests that value investing is an attractive strategy for patient investors.
• There are significant relative value opportunities across different regions, sectors, and styles.
• The US is expected to see a decline in returns due to the impact of rising real rates.
• Emerging markets, particularly Taiwan, offer higher expected returns due to favorable ERP and real rate conditions.
• The model provides specific recommendations for stocks in each category, based on their potential for price appreciation or depreciation.