• BBVA Global Markets Research believes that there are interesting investment opportunities following the major downward adjustment of the main assets. BBVA's experts expect the negative feedback of the markets to stop and the fundamentals of the economy and of companies to be valued once again at their usual level
  • BBVA's experts have adjusted downward their benchmark valuation levels for the main equity indices and expect the Euro Stoxx and the Ibex to reach 3,500 and 10,800 points. At current levels, both indices already exclude very negative profit scenarios
  • Following the major adjustment of valuations, they consider that there are interesting investment opportunities in quality companies in sectors such as energy, telecommunications, real estate and the financial sector. By investment style, sustainable dividends and quality small cap companies are the most attractive options

Antonio Pulido, BBVA Global Markets Research manager, and Ana Munera, Global Equity manager at BBVA Global Markets Research, presented this Wednesday in Madrid the main conclusions of their 2016 Strategic Equity Report. They also offered their forecasts for the fixed-income market.

Since August, the markets have begun to consider an increased likelihood of a major slowdown of the global economy as a result of the existence of vicious circles and certain dynamics in the markets. The 20% decline in the Dow Jones Transportation Average and the fall of more than 70% in the Baltic Freight Index evidence this deterioration of expectations. Also worth mentioning is the sharp rise in the returns of the American high yield market to levels close to 10%.

At BBVA Global Markets Research we consider that this downward adjustment in the markets offers an opportunity for buying risk assets if, as we believe, this negative spiral stops. The fact that oil prices and the currencies of emerging countries may be reaching floor levels, along with the high levels of liquidity worldwide and the maintenance of all-time low interest rates for risk-free assets would justify this view. At the same time, our base scenario is one of low, but stable global economic growth of around 3%, above what we believe is implicit in asset prices.

Antonio Pulido points to an adjustment in the economic model where "there is a clear transfer of wealth from emerging markets to the developed economies, along with the change in the global growth model from the manufacturing sector to the services sector". If we look at the sectors at the global level, we see how technology, health care and services have gained more than 70% on the stock markets over the last four years, while the industrial sector or capital goods have barely risen by 30%, and materials and energy have declined by 20%. This decoupling can also be seen in the credit market at both investment grade and high yield level.

We are therefore in a mature asset cycle where it is no longer enough for projects and investments to have a positive carry trade; they must also have very clear growth expectations closely linked to the new economy. Because of the major downward adjustment in the markets and the perception of instability, investors will be much more demanding in terms of yield/risk.

In fixed income, the main recommendations should focus on European companies that can benefit from the recovery of economic activity and consumer spending as a result of the fall in oil prices. Specifically, we would recommend cable operators (valued at 450/500 basis points above swap), the domestic telecommunications sector, European airlines or Reits. 

The global risk scenario, whose likelihood is not zero, would be the maintenance and/or feedback of vicious circles, which would increase the implicit probability of a recession. 

Hacia un escenario de menor rentabilidad en equity pero con potencial de subida aún

A pesar de las tensas condiciones financieras, las nuevas inquietudes sobre China y las dudas sobre la estructura de capital del sector bancario, nuestra opinión es que estamos en una desaceleración de mitad de ciclo, como en 1997, y no en plena recesión, como en 2007. Esta idea se apoya en nuestras perspectivas del escenario macro y sobre todo en las métricas de solvencia y de liquidez del sistema, que claramente están por encima de las observadas en periodos de recesión.

Es importante, sin embargo, ser conscientes de que desde 2015 estamos en una fase del ciclo de equity más avanzado y más dependiente del cumplimiento de las expectativas de beneficios de las compañías. En esta fase del ciclo tienden a producirse mayores oscilaciones en los mercados, tal y como evidencia la intensidad de las fluctuaciones que estamos viviendo desde agosto del año pasado. A pesar de ello, y a los niveles actuales, creemos que la renta variable ofrece una rentabilidad ajustada por riesgo atractiva a medio plazo, pero en la que no es posible obviar los riesgos del corto plazo, y es necesario seguir teniendo una preferencia clara por compañías de calidad.

Ante esta realidad hemos ajustado nuestro escenario de beneficios para reflejar un crecimiento  global potencialmente menor en 2016, lo que se traduce en una revisión a la baja de nuestros niveles de valoración razonable para los principales índices de renta variable, haciendo  especial énfasis en el binomio rentabilidad/riesgo a medio plazo. Nuestros nuevos niveles  para el Euro Stoxx y el IBEX son de 3500 y 10800 respectivamente. A los niveles actuales de cotización, las bolsas europeas y españolas ya tendrían incorporado un escenario negativo de beneficios en 2016.

Creemos que el IBEX ofrece un valor diferencial respecto a Europa. Sin embargo, las incertidumbres políticas y las inquietudes sobre América Latina aún podrían impedir la materialización de ese valor hasta el segundo semestre del año cuando las divisas latinoamericanas puedan empezar a estabilizarse.
Aunque seguimos prefiriendo inversiones en mercados desarrollados frente a emergentes, en América Latina las dinámicas de beneficios y las valoraciones justifican nuestra preferencia por Chile y México en términos de riesgo/rentabilidad.

Por sectores creemos que hay oportunidades muy interesantes en aquellos que cuentan con valoraciones atractivas, desde una perspectiva histórica, como energía, telecomunicaciones real estate y sector financiero. Además, seguimos pensando que los dividendos sostenibles son una estrategia aconsejable, especialmente en un entorno de tipos extremadamente bajos.

Por estilos, creemos que el universo de small cap sigue teniendo un mayor atractivo relativo, aunque en este segmento preferimos reforzar nuestro énfasis en la calidad. 

Toward a scenario of lower returns in equity, but still with a potential for rising

Despite the tight financial conditions, the new uncertainty surrounding China and the doubts over the capital structure of the banking sector, our opinion is that we are now in a mid-cycle slowdown, like in 1997, and not in a full recession, like in 2007. This idea is supported by our forecast for the macro scenario and, above all, by the system's solvency and liquidity metrics, which are clearly above those seen during periods of recession.

However, we should be aware that since 2015 we are in a stage of the equity cycle more advanced and more dependent on the fulfillment of the expectations of company earnings. Greater fluctuations in the markets tend to occur at this stage of the cycle, as evidenced by the intensity of the fluctuations we have seen since August last year. However, and at current levels, we believe that equity offers an attractive risk-adjusted return in the medium term, but without overlooking the short-term risks, and it is necessary to continue having a clear preference for quality companies.

In view of this reality we have adjusted our profit scenario to reflect a potentially lower global growth in 2016, which means a downward revision of our reasonable valuation levels for the main equity indices, placing special emphasis on the risk/return relationship in the medium term. Our new levels for the Euro Stoxx and the IBEX are 3,500 and 10,800 points, respectively. At current valuation levels, European and Spanish stock markets would already incorporate a negative earnings scenario in 2016.

In our view, the Ibex offers a differential value with respect to Europe. However, political uncertainty and the concerns about Latin America could still delay the realization of this value until the second half of the year, when Latin American currencies could start stabilizing.

Although we continue to prefer investments in developed markets rather than in emerging economies, in Latin America the earnings dynamics and the valuations justify our preference for Chile and Mexico in terms of risk/return.

By sector, we believe that there are very interesting opportunities in those with attractive valuations, from a historical perspective, such as energy, telecommunications, real estate and the financial sector. We also believe that sustainable dividends are a good strategy, especially in an environment of extremely low interest rates.
By style, we consider that the small cap universe is still more attractive in relative terms, although in this segment we prefer to emphasize quality. 

 

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