RANDY FREDERICK: While domestic markets are currently down a couple percent from recent highs, the outlook for global equities is still quite good. Jeff Kleintop, Schwab’s chief global investment strategist, joins me for the August 29 Schwab Market Snapshot to discuss why such optimism might actually be warranted. Welcome back, Jeff.
JEFF KLEINTOP: Thanks, Randy. It’s great to be with you.
RANDY: So, Jeff, equity valuations are pretty high at the moment and that could result in stagnant prices—unless those expectations can be met. So what is the global outlook for earnings right now?
JEFF: Well, fortunately, Randy, it’s the best in years. The analyst consensus estimate for earnings-per-share—for the next 12 months, for the world’s companies—is back to $30 for the fourth time in the last 10 years. Now, it seems to hit this level every three years.
First, it hit in in 2008, then it fell for obvious reasons—the big financial crisis. Came back to $30 in 2011, fell. Again came back in 2014, and now, again, here three years later, in 2017. But what’s different this time is that earnings have hit this $30 ceiling but are likely to finally break through given the strongest and broadest global economic growth we have seen in years.
For one thing, all of the world’s top 20 economies are growing this year—that’s actually been a rare occurrence over the last decade. We’ve also got the IMF, the International Monetary Fund, forecasting that growth may accelerate next year. And profit margins for key regions, like Europe or the emerging markets, are actually near their lows rather than their highs. So there’s a lot more reason to believe profits may finally break through that $30 level.
And you mentioned valuations. That’s really important because valuations—the PE ratio—the price-to-earnings ratio for the world’s companies, are at about a 15-year high. And so in order to break through that—in order for stocks to move higher—we need earnings to breakthrough that $30 barrier and move higher, as well. Fortunately, that now appears more likely than it has at any time in the last 10 years.
RANDY: Well, now, Jeff, I know you track global investing trends, and you also track the risks associated with the different markets where investing dollars are flowing into or flowing out of. What trends are you seeing now?
JEFF: Well, Randy, we usually talk about the market in terms of, you know, drivers that are moving the markets. But everything comes down to buyers and sellers, ultimately—and, so it’s important to watch these money flows. Interestingly, investors have been favoring non-U.S. markets for their stock market investments. In fact, at a 3-to-1 ratio of non-U.S.-to-U.S. this year.
And it’s worth noting because even though non-U.S. markets have out-performed U.S. markets this year, it isn’t merely performance-chasing when you break it down. For example, you know, we’ve seen strong money come—strong money inflows—into markets like Spain or Hong Kong, and they’ve done very well this year.
We’ve also seen money come out of markets that have done well this year, like Mexico or Hong Kong. And, in fact, some of the countries that have seen the strongest inflows like Japan or even the U.S. have kind of been in the middle of the pack performance-wise. So it doesn’t seem to be merely performance-chasing. And it also doesn’t seem to be driven just by risk aversion to political or geopolitical developments since we’ve also seen solid inflows to regions of the world that are geopolitical hot spots.
Most notably, South Korea has seen money come in pretty strongly this year despite the obvious threat there on the North Korean—from North Korea, on the Korean Peninsula. So this suggests that from a risk perspective ETF flows are not just hot money that could quickly reverse if performance trends stumble, but, instead, may be driven by a better growth outlook and the greater diversification that investors are seeking and that these markets now provide.
RANDY: Wow, that’s fascinating information, Jeff. Thanks so much. We need to wrap up.
Listen, if you want to read more from Jeff you can do that in the International Investing section of Schwab.com. You can follow Jeff on Twitter @JeffreyKleintop and, of course, you can always follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.