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UBS Investment Research
Global Equity Strategy
M ultiple Expansion
A slowing growth backdrop . . .
Global earnings growth is set to slow significantly in 2012 as the cycle matures.
Further, ongoing public- and financial-sector deleveraging are apt to result in a
persistently sluggish economic growth backdrop.
. . . with mounting margin pressure
Another implication of the maturing cycle is increased margin pressure. Corporate
profit margins have begun to roll over in recent quarters. Historically, these turns
have been followed by anaemic earnings growth (which we detail below). In fact,
in nearly half of the episodes we examined, earnings contracted over the 3-year
period following a peak in profit margins.
But multiples can expand
Within economic cycles, earnings growth and valuation multiples typically have an
inverse relationship. So while we’re stuck with a lousy growth backdrop, the good
news is that multiples do typically rise at this stage of the cycle. Further, the
combination of undemanding current valuations and an elevated risk premium lend
additional support to the re-rating case.
Piecing it together: Total return expectations
We expect global earnings growth in the low-single-digit range over the next few
years. Add the current 2.7% dividend yield and some modest multiple re-rating,
and it’s not overly demanding to expect total returns in the high single digit range
in coming years. This outlook is predicated, of course, on fading cyclical and
systematic risks, which would allow the equity risk premium to moderate
Return expectations – piecing it all together
Earnings growth: Earnings growth is slowing significantly in 2012 as we
proceed through a more mature phase of the cycle. Sluggish global economic
growth, marked by public- and financial-sector deleveraging, a European
recession, and the lingering effects of austerity measures, will likely persist.
Further, margin trends look poised to weigh on earnings growth. As such, we
expect low single-digit earnings growth for the next few years.
Valuations: Given the earnings growth backdrop, the burden of returns falls
to multiple expansion. The good news is that multiples typically rise at this
stage of the cycle. Further, given the relatively undemanding level of
valuations and an elevated equity risk premium, the potential for multiple
expansion appears well-supported. While risks certainly remain, given the
historical trends and relationships, expansion seems more likely than not.
Total return: The MSCI AC World index is currently yielding 2.7%, at a
relatively low payout ratio, leaving room for considerable dividend growth.
As such, we believe dividend income will be an important component of
total returns going forward. Add low single digit earnings growth and some
modest multiple re-rating, and it does not appear overly demanding to expect
total returns in the high single digits in coming years. Compared to bonds,
this is likely to be a solid return backdrop.
Risks: The most significant risks to the case presented above revolve around
the cyclical earnings outlook and the systematic risks posed by the European
sovereign debt crisis. In the case of the former, the base case of the UBS
Global Economics team is for global GDP to expand by 2.8% in 2012, with
the US managing 2.2% and Europe contracting by 0.7%. Such tepid growth
means that cyclical risks will remain elevated. In addition, as we detailed
above, peaking margins can lead to falling earnings. Our estimate of low
single digit earnings growth compares with a current consensus forecast of
nearly 10%, with the implication that earnings downgrades are likely to
continue. We believe the market can tolerate further downgrades if current
trends hold; however should the margin cycle deteriorate more than we
anticipate, a re-acceleration of earnings downgrades is likely, which would
be a clear negative for equity valuations.
With regard to Europe, the recent steps taken to support the banking system
and provide Greece with further fiscal assistance have been positive insofar
as they have alleviated near-term systematic risks. However, the overall
sovereign debt crisis remains unresolved, and thus will continue to pose
meaningful risks to markets. Any deterioration in the crisis, or even failure to
maintain momentum toward structural reform, would likely prevent risk
premia from moderating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Global Equity Strategy
M ultiple Expansion
A slowing growth backdrop . . .
Global earnings growth is set to slow significantly in 2012 as the cycle matures.
Further, ongoing public- and financial-sector deleveraging are apt to result in a
persistently sluggish economic growth backdrop.
. . . with mounting margin pressure
Another implication of the maturing cycle is increased margin pressure. Corporate
profit margins have begun to roll over in recent quarters. Historically, these turns
have been followed by anaemic earnings growth (which we detail below). In fact,
in nearly half of the episodes we examined, earnings contracted over the 3-year
period following a peak in profit margins.
But multiples can expand
Within economic cycles, earnings growth and valuation multiples typically have an
inverse relationship. So while we’re stuck with a lousy growth backdrop, the good
news is that multiples do typically rise at this stage of the cycle. Further, the
combination of undemanding current valuations and an elevated risk premium lend
additional support to the re-rating case.
Piecing it together: Total return expectations
We expect global earnings growth in the low-single-digit range over the next few
years. Add the current 2.7% dividend yield and some modest multiple re-rating,
and it’s not overly demanding to expect total returns in the high single digit range
in coming years. This outlook is predicated, of course, on fading cyclical and
systematic risks, which would allow the equity risk premium to moderate
Return expectations – piecing it all together
Earnings growth: Earnings growth is slowing significantly in 2012 as we
proceed through a more mature phase of the cycle. Sluggish global economic
growth, marked by public- and financial-sector deleveraging, a European
recession, and the lingering effects of austerity measures, will likely persist.
Further, margin trends look poised to weigh on earnings growth. As such, we
expect low single-digit earnings growth for the next few years.
Valuations: Given the earnings growth backdrop, the burden of returns falls
to multiple expansion. The good news is that multiples typically rise at this
stage of the cycle. Further, given the relatively undemanding level of
valuations and an elevated equity risk premium, the potential for multiple
expansion appears well-supported. While risks certainly remain, given the
historical trends and relationships, expansion seems more likely than not.
Total return: The MSCI AC World index is currently yielding 2.7%, at a
relatively low payout ratio, leaving room for considerable dividend growth.
As such, we believe dividend income will be an important component of
total returns going forward. Add low single digit earnings growth and some
modest multiple re-rating, and it does not appear overly demanding to expect
total returns in the high single digits in coming years. Compared to bonds,
this is likely to be a solid return backdrop.
Risks: The most significant risks to the case presented above revolve around
the cyclical earnings outlook and the systematic risks posed by the European
sovereign debt crisis. In the case of the former, the base case of the UBS
Global Economics team is for global GDP to expand by 2.8% in 2012, with
the US managing 2.2% and Europe contracting by 0.7%. Such tepid growth
means that cyclical risks will remain elevated. In addition, as we detailed
above, peaking margins can lead to falling earnings. Our estimate of low
single digit earnings growth compares with a current consensus forecast of
nearly 10%, with the implication that earnings downgrades are likely to
continue. We believe the market can tolerate further downgrades if current
trends hold; however should the margin cycle deteriorate more than we
anticipate, a re-acceleration of earnings downgrades is likely, which would
be a clear negative for equity valuations.
With regard to Europe, the recent steps taken to support the banking system
and provide Greece with further fiscal assistance have been positive insofar
as they have alleviated near-term systematic risks. However, the overall
sovereign debt crisis remains unresolved, and thus will continue to pose
meaningful risks to markets. Any deterioration in the crisis, or even failure to
maintain momentum toward structural reform, would likely prevent risk
premia from moderating.
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