David Hernandez, CFA
Senior Research Analyst, Non-U.S. Equities
Despite poor earnings growth in 2019, global equities had a strong year, generating double-digit returns. The MSCI World Index, a developed global equity benchmark, and the MSCI Emerging Markets (EM) Index returned 28.4% and 18.4%, respectively. Paradoxically, however, earnings growth was negative for both indices in 2019. Why were equity returns so strong while earnings growth was so weak? One key reason was investor reaction to central bank activity.
Throughout most of the world, central banks took accommodative actions in response to slowed economic growth. The developed markets central bank policy rate dropped from 1.96% to 1.39% between 2018 and 2019. Emerging countries also acted as China, Brazil, Indonesia, Mexico, Russia, Turkey, and the Philippines all deployed interest rate cuts. This central bank activity boosted investor optimism leading to strong returns in anticipation of better economic and earnings data in the year ahead.
Looking forward, 2020 earnings growth estimates range from 8% to 14%. In a typical year, estimates are revised downward as analysts begin the year with a more optimistic view. In fact, at this time last year, 2019 estimates ranged between 5% and 8%. Will the 2020 expectations hold up as we move through the year? We think markets are betting that they will and that a significant miss, similar to 2019, is likely to lead to disappointing returns in the year ahead.
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