What a year it was!
Looking back over this past year seems as if one was in a dream. 2020 started where 2019 left off as equity markets continued their advance. Then came the pandemic and government-initiated lockdowns. Sentiment toward equities soured, which suppressed valuations for the first half and the outlook for the remainder of 2020 appeared dismal at best.
Fast-forward through the second half of the year and this negativity was short-lived as equity markets more than retraced, providing a few surprises along the way.
For the quarter, U.S. equities rose 14.7% while foreign equities increased 17.0%. The surprises during the quarter; Value outperformed Growth while small caps outperformed large caps across all markets. Emerging markets accelerated 19.7% during the fourth quarter as the dollar weakened and investors anticipated a resurgence in economic activity.
As mentioned in the “Economic and Market Overview,” the global economy is anticipated to grow during 2021 within a range of 3.5% to 4.5%. Supporting this thesis are the ongoing efforts by both fiscal and monetary authorities to promote and sustain economic growth within this pandemic-fluid environment. Coupled with continued low interest rates, it appears equity valuations are poised to continue their ascent. Analysts appear optimistic regarding both revenue and earnings growth of publicly traded companies during 2021. According to FactSet, analysts project revenue and earnings of U.S. companies to increase year-over-year 8.0% and 26.8%, respectively. Upward revisions of both revenues (58.9%) and earnings (60.5%) have outpaced downward revisions (41.1% and 39.5%, respectively).
Outside the United States, revenues are projected to grow 5.5% year-over-year, below that of U.S. peers. Conversely, earnings are anticipated to grow 30.5% year over year, exceeding estimates associated to U.S. peers. That said, the spread between analyst revisions for both revenues and earnings is wider, which may indicate some degree of euphoria built into estimates.
Valuations appear stretched as U.S. equities currently exhibit a price to earnings ratio for the next 12 months (P/E NTM) of 23.4x, which is materially higher than its trailing 10-year average P/E NTM of 18.1x. Foreign equities may appear more attractive given their P/E NTM of 17.4x versus a historical average of 13.6x. Note that foreign equities have historically traded at a discount to their U.S. peers.
That said, this upcoming year is unique in many ways. The outcome of the U.S. elections present change in the composition of the Executive and Legislative branches, thus policy (e.g., taxes) and associated regulations. Also, the pandemic continues to be a veil impacting investor sentiment.
As we navigate into and through 2021, we remain cautiously optimistic regarding equities. We believe this prudent given the topics we have discussed. Markets are forward-looking, and while change is inevitable, no one can predict with exact certainty the outcomes afforded in the future. Our proprietary process emphasizes risk management. As such, our bias remains toward liquidity as investors digest and react to changes that may occur in this post-election, pandemic-fluid year.
We believe opportunity exists within the equity landscape as investors have consistently bid valuations higher given the expectation of actions to sustain the global economy by fiscal and monetary authorities. The anticipated increase in economic growth, coupled with expectations for revenue and earnings growth in the face of low interest rates, prompt continued consideration of equities. While valuations may appear stretched, equities appear poised to continue their upward trajectory, albeit at a somewhat lower rate of increase. Given this fluid situation going forward, we anticipate somewhat higher volatility, which supports our bias to liquidity.
We anticipate investors will prefer the liquidity associated with domestic large caps, thus our bias remains toward domestic large cap over small cap. Similarly, we retain our neutral positioning regarding domestic equities relative to foreign equities.
Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
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