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2022: USA and Europe more attractive than Emerging Markets

Luxembourg, 21 December 2021 – The global economic recovery extends into the new year, which is set to support corporate profits. While the economy in the US keeps moving right along, it is only gradually picking up speed in Europe. Both regions remain the first choice for equity investors. On the other hand, Emerging Markets, especially the Asia region, continue to be caught in the wake of China’s development, where uncertainty prevails. “For the time being, the EM Asia region has lost some of its attractiveness due to the more positive economic outlook in Europe and the US”, said Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM.

Global economic output rose by between five and six per cent in 2021. This strong growth will continue – even if at a somewhat slower pace – in the coming year. Recently, however, differences have become visible between the major economic regions.

The US economy is going full steam ahead; it will likely have grown by some five and a half per cent this year, supported by government cash injections and strong private consumption. US economic strength is also reflected in above-average corporate earnings. In Q3/2021, profits rose by more than 40 per cent compared with the same quarter of the previous year. For Q4, an increase of more than 20 per cent is expected – and next year will likely see continued sound earnings. The economy remains strong; GDP is currently forecast to grow by just under four per cent in 2022.

Europe, on the other hand, experienced a setback in Q2 and Q3 of 2021 following an earlier economic recovery. The weakness was caused by new corona waves, high energy prices and supply problems for raw materials and intermediates. “The final quarter of 2021 and Q1 of 2022 will therefore see low growth, before the economy in Europe will pick up again toward the middle of 2022”, Gerlinger pointed out. Overall, growth rates in the US and Europe should converge again in 2022.

After a strong start to 2021, the economy in China also slowed somewhat. “The Chinese government will use the crisis in the real property area to release some air in this sector, which is overheated but very important for the overall economy”, said Gerlinger. In addition to the real property sector, exports are the most important economic driver. The Asia region as a whole is unable to escape the developments in China, which is why it remains rather unattractive for investors for now.

Despite their relatively high valuation, US stocks therefore remain attractive for equity investors, especially because of the solid corporate results that support the high prices with real profits. “In particular the technology sector remains promising”, Gerlinger highlighted. “Businesses will continue to invest more in technology in the coming years, not least to compensate in the best possible way for the demographic problem that is looming ever larger in the long term –  the shortage of qualified personnel.” Cyclical businesses also remain interesting in the phase of relatively high economic growth. “In the small cap sector, we currently see greater opportunities in Europe.”

Europe continues to suffer from high covid incidence figures for now, but the economy is expected to pick up somewhat in Q2 of 2022. European equities remain more favourably valued than US equities, but are also facing lower earnings growth. With their strong cyclical positioning, European equity markets should benefit significantly from the upcoming economic recovery. Small caps in particular offer opportunities, “but the selection quality of fund managers is required, because they are not reflected via passive investments by investors”, Gerlinger explained.

In conclusion, caution is the order of the day for Emerging Markets because of China’s problems. “Due to the better short-term economic outlook in the US compared to Europe, we went for more significant overweighting in the US while lowering the overweight in Europe”, said Gerlinger. The US overweight is more clearly focused on the technology sector again, although without neglecting value weighting.

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