Pioneer Investments gives bullish outlook for equities

BullBearEuropean corporate earnings will support equities, while pent up demand in the US following a period of bad weather will help sustain the American economy and benefit emerging markets, too, fund managers at Pioneer Investments told their clients last week. These were three of the bullish outlooks for economies that came out of the Pioneer Investment annual client conference in Boston. Funds Europe was media partner at the event. Diego Franzin, head of equity Europe, said Pioneer expected European corporate earnings to come back this year. “What happened over the last quarter [in 2013] was not great but [earnings were] in line with expectations.” He said three reasons to be positive for earnings were higher growth, central bank support, and improving levels of operating leverage. Improving operating leverage in a business generally means sales are contributing more and more to profitability rather than to paying fixed costs. “For every unit in the growth of sales [operating leverage] is double in Europe compared to the US,” Franzin said. But to have sustainable growth Franzin said companies needed to start focusing on capital expenditure, which indicators suggested they would. The best way to play European equities so far has been to hold stocks exposed to domestic demand rather than emerging markets. He is positive for the IT sector as banks and governments look to spend on IT development, and he says the energy sector, which is also a domestic play, is neglected. The domestic bias has led to Italy’s stock market outpacing Spain as Italy has more stocks exposed to the domestic story, though Franzin says he prefers Spain. Some domestically exposed stocks have become more expensive than stocks exposed to the emerging markets, he said, and so stocks with emerging market exposure should not be ruled out. On a similar note, the conference also heard that some US-exposed emerging market companies could also recover and do well this year. Kenneth J. Taubes, head of investment management US, said: “When the US is doing better, and [other markets, such as the UK] how is it that exporters from EM [emerging markets] will do worse? I think some of the large EM exporters are going to do well.” He also said that after the worst weather in the US for years in 2013, “we are going to see some payback”. The view was supported by Vincent Reinhart, former director of the division of monetary affairs of the Federal Open Market Committee and now chief US economist with Morgan Stanley, who spoke at the conference. He said, with the weather effect abating and with solid non-farm payroll data, the US would see an “uncoiling spring of pent up demand” among consumers. ©2014 funds europe

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