2017 Market Outlook - International Equity

INTERNATIONAL EQUITY

Chris Alderson

Head of International Equity

November 17, 2016

2017 Global Market Outlook Press Briefing

2

The Bull Market No One Loved

*Begins on March 9, 2009, which was the low point for the S&P 500 during the financial crisis.

Past performance cannot guarantee future results.

Sources: FactSet, Standard & Poor’s, and MSCI. Returns in USD.

+276%

+146%

+130%

+111%

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016

Ind

ex

Le

ve

l (1

00

= 3

/9/2

00

9)

REGIONAL RETURNS

March 2009*–September 2016

S&P 500

MSCI Europe

MSCI Emerging Markets

MSCI Japan

“The Death of Equities?”

3

The Scarcity of Growth

As of September 30, 2016

Source: FactSet.

7.1 7.0 6.7

5.1

3.1 3.0

2.5

2.0

0.6

-1.2

-2.4

2.6

1.5 1.5 1.1

0.4

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Rea

l G

DP

Gro

wth

Yo

Y %

REAL GDP GROWTH

YEAR-OVER-YEAR (%)

-40

-20

0

20

40

60

80

100

120

140

2007 2008 2009 2010 2011 2012 2013 2014 2015

Emerging Markets Europe ex UK

Japan United Kingdom

United States

REGIONAL PROFITS (EPS IN USD) In USD Since Last Cycle Peak (October 2007)

4

The Hope for Growth


Sources: Ministry of Health, Labour & Welfare; Statistical Office of the European Communities; Bureau of Labor Statistics; Haver Analytics; and

Morgan Stanley Research.

-5

-4

-3

-2

-1

0

1

2

3

4

2004 2006 2008 2010 2012 2014

Ye

ar-

Ove

r-Y

ea

r %

Gro

wth

EMPLOYMENT GROWTH BY REGION

JapanEUUS

CORPORATE EARNINGS—WHERE NEXT?

Falling Rates

Rising Earnings

Higher Rates

Rising Earnings

Falling Rates

Falling Earnings

Higher Rates

Falling Earnings

MOST BULLISH

MOST BEARISH

?

5

Growth Motoring, Markets Rotating



Sources: MSCI, total return indices used for MSCI Value and MSCI Growth. Source for MSCI data: MSCI. MSCI makes no express or implied warranties or

representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a

basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

80

100

120

140

160

180

200

220

240

197

6

197

8

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

MSCI WORLD VALUE—MSCI WORLD GROWTH

Total Return Indexed to 100

Value - Growth Mean -1 St Dev

-2 St Dev +1 St Dev + 2 St Dev

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

TOTAL RETURN (%)

Dec. 31, 2014‒Feb. 11, 2016

Feb. 16, 2016‒Sept. 30, 2016

6

Economic Inequality and the

Protest Vote

As of December 31, 2015

Sources: FactSet, Haver Analytics, Standard & Poor’s, Bureau of Economic Analysis, Federal Reserve Board, Tax Policy Center, Citizens for Tax Justice,

and T. Rowe Price.

*Equal-weighted total return of U.S. equities (S&P 500) and U.S. 10-year government bonds.

0%

5000%

10000%

15000%

20000%

25000%

30000%

40%

42%

44%

46%

48%

50%

52%

54%

1950 1960 1970 1980 1990 2000 2010

Cu

mu

lativ

e R

etu

rn

NA

ICS

U.S

. W

ag

es

as

% o

f G

DP

Wages as % of GDP

Equal-Wtd Equity and Bond Blend*

WALL STREET BOOM, MAIN STREET BUST

1950‒2015

BREXIT

7

Profits—U.S. Economy Versus

the S&P 500 Index

Sources: Deutsche Bank Research and Haver Analytics.

Service industries are: financials; multiline retail; specialty retail; Internet and

catalogue retail; diversified consumer services; hotels, restaurants, and

leisure; IT services; health care providers; and services.

86%

32%

14%

68%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Share of U.S. Employment Share of S&P 500 Earnings

THE U.S. ECONOMY VS.

THE S&P 500 INDEX

As of October 31, 2015

Service Industries Manufacturing/Goods Producing Industries

65%

43% 42%

34%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

200

8 Q

1

201

3 Q

2

201

3 Q

3

201

3 Q

4

201

4 Q

1

201

4 Q

2

201

4 Q

3

201

4 Q

4

201

5 Q

1

201

5 Q

2

201

5 Q

3

201

5 Q

4

201

6 Q

1

201

6 Q

2

201

6 Q

3 (

E)

201

6 Q

4 (

E)

201

7 Q

1 (

E)

201

7 Q

2 (

E)

201

7 Q

3 (

E)

201

7 Q

4 (

E)

Cu

mu

lati

ve

Gro

wth

in

Op

era

tin

g E

arn

ing

s P

er

Sh

are

EARNINGS GROWTH BY SECTOR

2013—2017E

S&P 500 Health Care and Information Technology

S&P 500 Financials and Utilities

S&P 500 Consumer Discretionary and Consumer Staples

S&P 500 Energy, Industrials, and Materials

20

13

Q1

8

Europe’s Pain



Source: FactSet.

U.S. VS. EUROPEAN EQUITIES

RELATIVE PRICE PERFORMANCE (USD)

EUROPE AS A % OF WORLD MARKET

CAPITALIZATION

20%

22%

24%

26%

28%

30%

32%

34%

36%

38% MSCI Europe Market Cap Relative to World Market Cap

40

50

60

70

80

90

100

110

120

130

196

9

197

2

197

5

197

8

198

1

198

4

198

7

199

0

199

3

199

6

199

9

200

2

200

5

200

8

201

1

201

4

S&P Minus Europe

Mean

-1 St Dev

+1 St Dev

9

European Profits—Why so Bad?

Chart is shown for illustrative purposes only and does not represent the performance of any specific security.

Sources: FactSet and MSCI.

-26.4

%

-13.4

%

-11.6

%

-6.8

% -3

.0%

0.4

%

1.4

%

1.9

%

2.4

%

3.3

%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

MSCI EU: CONTRIBUTION TO

EARNINGS CHANGE BY SECTOR

October 2008 to August 2016

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

Oct-

08

Ap

r-09

Oct-

09

Ap

r-10

Oct-

10

Ap

r-11

Oct-

11

Ap

r-12

Oct-

12

Ap

r-13

Oct-

13

Ap

r-14

Oct-

14

Ap

r-15

Oct-

15

Ap

r-16

MSCI EU INDEX: PERCENT OF EARNINGS

FROM ENERGY, MATERIALS, AND FINANCIALS

October 2008‒August 2016

Energy

Materials

Financials60%

18%

10

0

2

4

6

8

10

12

14

16

18

20

22

Ye

n (

Tri

llio

n)

FY

TOTAL SHAREHOLDER RETURNS

OF ALL LISTED COMPANIES

On a Common Stock Basis 1990‒2017 (Est. for 2016‒2017)

Dividends

Share Buybacks

Japan—What Is Changing

As of July 31, 2016


Sources: Corporate Reports, Japan Exchange Group, and Empirical Research Partners Analysis.

Data exclude financials and utilities. Share buybacks are net of share issuance.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1stSection

2ndSection

Mothers JASDAQ Total JPX-Nikkei400

JAPANESE SHARE OF STOCKS

WITH INDEPENDENT DIRECTORS

BY LISTING CATEGORY

2014

2015

11

China—A Hard Landing Within a

Soft Landing


Sources: FactSet, Haver Analytics, and China National Bureau of Statistics.

4

6

8

10

12

14

16

Ye

ar-

Ove

r-Y

ea

r %

Ch

an

ge

CHINA: REAL GDP GROWTH

January 2005–June 2016

51%

30%

35%

40%

45%

50%

55%

Se

rvic

es

as

% o

f G

DP

CHINA: SERVICES SHARE OF THE ECONOMY

1992‒2Q16

12

Emerging Markets—Rates Down as

Inflation Abates

Sources: Various National Statistical Agencies, Haver Analytics, and T. Rowe Price.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2010 2011 2012 2013 2014 2015 2016

Ye

ar-

Ove

r-Y

ea

r %

Ch

an

ge

EMERGING MARKET INFLATION

January 2010–August 2016

India

Brazil

China

Russia

0%

02%

04%

06%

08%

10%

12%

14%

16%

18%

20%

2010 2011 2012 2013 2014 2015 2016

EMERGING MARKETS

CENTRAL BANK RATES

January 2010–September 2016

India

Brazil

China

Russia

13

Emerging Markets: Uncertainty and

Opportunity

Sources: FactSet and Empirical Research Partners Analysis.

Top quintile compared with sector average.

VALUATIONS REFLECT CHANGE

AND UNCERTAINTY 12-Month Forward P/E as of September 30, 2016

0 5 10 15 20

Mexico

India

Philippines

U.S.A.

Indonesia

Malaysia

The World Index

Chile

Europe

South Africa

Thailand

Taiwan

Japan

Brazil

Czech Republic

Peru

Greece

China

Qatar

United Arab Emirates

Colombia

Poland

Hungary

Egypt

South Korea

Turkey

Russia

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Sta

nd

ard

Devia

tio

n

EMERGING MARKETS VALUATION SPREADS

The Top Quintile Compared With the Market Average January 1992‒September 2016

Valuation Spread

1 Standard Deviation

-1 Standard Deviation

One Standard

Deviation

Average

NARROW

DISPARITIES

WIDE

DISPARITIES

14

Multiples Have Expanded, but Extremes

(or Crises) End a Cycle


Past performance is not a reliable indicator of future performance.

Sources: FactSet and MSCI. Source for MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever

with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial

products. This report is not approved, reviewed, or produced by MSCI.

5

7

9

11

13

15

17

19

21

23

25

27

29

Pri

ce

-to

-Ea

rnin

gs

Rati

o

DEVELOPED VS. EMERGING MARKETS

12-Month Forward P/E January 1996–September 2016

MSCI World

LT AVERAGE

MSCI EM

LT AVERAGE

MSCI World Long-

Term Average

16.2x

MSCI EM Long-

Term Average

11.8x

0

10

20

30

40

50

60

70

80

90

100

1993 1996 1999 2002 2005 2008 2011 2014

P/E

NT

M/I

mp

lie

d P

/E

EQUITY AND BOND VALUATIONS

July 1993–September 2016

US Treasury 10 Year 1/Yield

German Bund 10 Year 1/Yield

S&P 500

Japan TOPIX

MSCI Germany

Maximum

Value 714

15

Global Equities: A Fork in the Road


Equity market sentiment has become increasingly divided as the bull

market has matured. This is an opportunity for the well-informed stock

picker but implies rising market risks.

China and the energy sector are experiencing major structural change,

adding to the natural bouts of volatility created by an equity market thesis

that is in transition.

Reasonable valuations, modest global profit growth, and cash-rich balance

sheets should provide support to global equities. It is important to temper

return expectations, however.

Emerging market equity fundamentals are as dispersed as ever and

selectivity is critical. Emerging market-listed stocks delivering long-term

growth should regain/retain a premium in a lower-growth world.

Political uncertainty and popular protest have become mainstream as

economic inequality is being called into question. Fiscal stimulus is one

potential outcome.

16

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any nature and prospective investors are recommended to seek independent legal, financial, and tax advice before making any investment decision.

The views contained herein are as of November 2016 and may have changed since that time.


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Economy & Finance

2017 Market Outlook - International Equity