Finding Resilient Returns as Global Equities Rally

Global equities advanced in the third quarter, as steady macroeconomic growth supported solid earnings reports. In the evolving market environment, we believe that individual company performance will make a bigger difference to stock returns.

Equity investors have had plenty of reasons to cheer this year. The MSCI World Index advanced by 3.9% in the third quarter (Display, left), to return 12.5% this year, in local-currency terms. Escalating geopolitical tensions between the US and North Korea hardly dented the positive sentiment toward stocks.

Resources stocks outperformed as oil prices rebounded (Display above, right). Emerging-market (EM) stocks outpaced developed-market equities. European market gains lagged in July and August after a strong first half, as investors became concerned that the appreciating euro would hurt exporters even as it signaled confidence in the region’s political stability. But stocks in the region rebounded in September as the US dollar strengthened.

US large-caps did well, fueled by Facebook, Netflix, and other so-called FAANG stocks, which accounted for more than 20% of the S&P 500 Index returns this year. Their popularity has helped fuel returns for growth stocks, which have outperformed value stocks by a wide margin in the first three quarters of 2017.


The recovery of emerging markets is one of the most important developments for equity investors in 2017. In the first nine months of the year, the MSCI Emerging Markets Index has advanced by 24% in local currency terms—nearly twice the performance of the MSCI World Index.

Talk of rising US interest rates hasn’t derailed EM equities. Unlike the “taper tantrum” in 2013, which hit EM stocks hard, concerns about rising rates have passed over the developing world. Emerging markets are less vulnerable to external shocks than in the past. Increased foreign direct investment means that emerging markets are less reliant on funding from shorter-term portfolio flows, which are more prone to flight. Currencies are more competitive and short-term debt levels have declined. These trends reduce the vulnerability to external shocks, such as rising US interest rates.

But domestic macro improvements are really only part of the story. EM equity gains are actually being driven by a consistently improving earnings outlook. Consensus expectations project a 30% increase in earnings per share for EM companies over the next two years. That said, industry outlooks vary widely in emerging markets—and volatility can be acute—so it’s especially important for investors to take a highly selective approach and focus on individual stocks with the strongest potential.


Developed-world stocks have also been helped by optimism about the outlook for corporate earnings. Our portfolio managers meet regularly with the managements of companies around the world. These days, we often hear that a comfortable macroeconomic environment is supporting positive business dynamics across many industries.

Indeed, global GDP is advancing at an annual pace of more than 3%, helped by a continued recovery in the euro area and Japan. It really is a global Goldilocks economy, with moderate and steady growth that hasn’t fueled inflationary pressures. This, in turn, allows major central banks in Japan, the euro area and the US to maintain relaxed monetary policies. And that’s good for stocks. For example, the US Federal Reserve’s signal in late September that it will slowly and incrementally raise interest rates has reassured investors that favorable macro and monetary conditions should continue.