Equities Post-2008—What’s Next?

Coverage of the 2014 Global Investment Conference

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confusing signDuring an engaging discussion with Scott Berg, portfolio manager, Global Growth Equity Strategy, at T. Rowe Price, delegates had the opportunity to ask their questions on where markets are headed in the next year and beyond. Highlights are below.

Do you see the post-financial crisis dynamics of the equities markets changing?

Since the global financial crisis, the broad increase in equities prices has been driven largely by increases in multiples, not earnings. In 2013, for example, U.S. stock valuations increased by more than 20 percent, while multiples in Europe climbed by over 30 percent. One notable exception to last year’s multiple expansion was emerging markets, where valuations actually fell. We believe that earnings will become increasingly important going forward, as investors become less willing to push multiples higher.

How could rising political risk affect performance in some emerging markets?

Although most people think of political risk in a negative sense, political upheaval is really a double-edged sword because it can result in either positive or negative outcomes. For example, at the height of the eurozone sovereign debt crisis in 2011, European politicians could not agree on any sort of coherent response to the crisis. European markets sold off sharply as a result of the political risk, but in retrospect that was a perfect time to buy. As a result of current political uncertainty, some emerging markets have fallen to levels that don’t reflect the intrinsic value of many of the companies based there.

Is China still at risk for a hard landing?

I still lose a lot of sleep about China, but I think that the situation was even scarier a year ago, before the change in government. I do believe that China has a handle on its economic issues, but I anticipate some bumps in the road as the country tries to keep its economy growing at a high rate without creating unsustainable bubbles and, ultimately, a hard economic landing. I think that China will ultimately succeed in engineering a soft landing.

What are the prospects for the U.S.?

Although U.S. stock valuations moved considerably higher last year, U.S. earnings also grew more than earnings in any other region. In fact, U.S. corporate earnings are now at about 125 percent of their level from before the global financial crisis. However, it has taken massive amounts of quantitative easing from the Federal Reserve to help companies rebuild their earnings, and the U.S. economy still is not in great shape. Overall, I see the U.S. market as the best option in a not-so-great developed world. 

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