Equities: looking for upside

04 October 2019

4 minute read

By Julien Lafargue, CFA, London UK, Head of Equity Strategy

Further upside in equity markets will likely be more muted, but opportunities to generate alpha remain intact.

Optimism on the rise

The two catalysts we highlighted in last month’s Market Perspectives, namely central bank action and trade détente, materialised in September. As a result, investors’ sentiment shifted again from “doom and gloom” to optimism and propelled equity markets back to record levels.

Yet, not much has changed fundamentally. Trade tensions have abated, though the US-China talks scheduled for this month are unlikely to deliver a comprehensive deal. Similarly, uncertainty around Brexit remains elevated and central banks may not have much more room to ease. Even if October brings more clarity on these issues, we continue to believe that the market may struggle to break from its current trading range.

Strong rally hard to justify

Equity markets rise because earnings move higher and/or investors are willing to pay more for future earnings (i.e. the valuation multiple expands). As we enter the final quarter of 2019 and look to 2020, we see limited upside to both sides of this equation.

Limited earnings upside

On the earnings front, expectations appear elevated already. The bottom-up consensus is for worldwide earnings to grow by 10% in 2020. That said, earnings will probably grow less than 2% in 2019. In a world where gross domestic product is expected to remain stable at around 3%, we see limited room for earnings upgrades, without any significant fiscal stimulus.

Valuations are fair

On valuations, global equities are trading in line with their 20-year historical average, which seems fair. However, this headline number masks some disparities.

Global equities are trading in line with their 20-year historical average, which seems fair.

US equities are trading at 17 times their projected earnings over the next 12 months. This is 7% above the historical average. While some optimists may argue that we are still far away from the 18.5 times reached in January 2018, we believe this reference is not justified. January’s figure was artificially inflated as the equity market rallied in anticipation of corporate tax cuts not reflected in analysts’ numbers. Adjusting for this, the S&P 500’s peak multiple never surpassed 17.5.

Opportunities remain

With limited upside to earnings and valuations approaching recent peaks, the outlook for equity markets may feel uninspiring. And yet, there is plenty to cheer about in our opinion.

First, downside risks should be contained. Indeed, investor positioning, accommodative monetary policy and hopes of fiscal stimulus should support equity markets. Second, although 2020 is unlikely to be another “20% return” year, continued earnings growth coupled with healthy dividend yields point to positive returns, assuming valuations can hold. Finally, beyond broad equity indices, opportunities continue to emerge at the sector and stock level, offering a supportive backdrop for active managers.


Market Perspectives October 2019

Barclays Private Bank investment experts highlight our key investment themes. They show how security selection and a bias to quality companies can provide the yield and outperformance needed at a time when it may be tougher to produce positive returns.


We give you versatility and a choice of services

Barclays Private Bank provides discretionary and advisory investment services, investments to help plan your wealth and for professionals, access to market.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

This document has been issued by the Investments division at Barclays Private Banking and Overseas Services (“PBOS”) division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.

Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.

This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.

Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.

Neither Barclays, its affiliates nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.

This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted.  You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.

The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.