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Despite the investor optimism around the new administration in the White House — including the potential for reduced regulation and lower corporate taxes — international equity markets, both developed and emerging, outperformed the US in the first quarter of 2017. As fears of a more protectionist US have abated, political risks in Europe and elsewhere appear to be declining. The defeat of populist candidate Geert Wilders in the recent Dutch election, and the strength of pro-EU candidate Emmanuel Macron in the French election polls, have lent credence to the view that political visibility is improving after the 2016 surprises of the “Brexit” vote in the UK and Donald Trump’s election in the US. European stocks, and the euro currency, should benefit as prospects of populist/nationalist candidates diminish. At the same time, the economic outlook is improving in Europe, just as the pro-business agenda in the US appears to be stalling.

Six-year highs

Eurozone PMIs recently hit a six-year high, and business and consumer sentiment are much improved. Most banks in Europe have built a significant capital cushion, and with the European Central Bank now expecting economic growth of 1.8 per cent this year and next, the outlook for profits in the financial sector looks more promising than it has for some time, which should lead to higher rates. Moreover, while profit margins in the US have been pressured for the past two years by increasing wages, Europe’s lower level of overall employment means that labour cost inflation should remain muted. With their currencies, specifically the euro and the pound sterling, at or below 10-year lows, European multinationals find themselves in an increasingly competitive position relative to their global peers.

Meanwhile, Asian companies will continue to benefit from growth in China, where household consumption continues to grow at high single digits, and innovation in the technology sector continues apace. Ongoing improvement in corporate governance — where Asia has historically lagged the West — should provide further support to valuations in Japan and other regional markets. In the emerging economies, markets are off their 2016 lows, while valuations are undemanding relative to history and to their expected growth rates.

Brighter outlook

While the US economy remains solid, and corporate balance sheets are strong, the post-election run-up in stock prices offers reason for near-term caution. With valuation upside hard to find in the US market, we believe that the combination of positive political trends, recovering economies and low expectations makes international equity markets relatively compelling.

— Benjamin Segal, Portfolio Manager and Head of Global Equity Team, Neuberger Berman