European equities identified as promising in 2022

European equities may take the lead in 2022, according to the State Street Global Advisors 2022 Global Market Outlook published this week.

The outlook pains a complex picture for the coming year but suggests that Europe may well take the lead over the US in terms of equity performance.

“The coming year presents a complex picture as the global economy finds itself on an uncertain climb toward recovery,” it said. “Increased volatility is also looming, as equities markets rise and fall in response to the ebb and flow of the global pandemic, and in response to policy signalling.”

“Corporate earnings have surprised to the upside, and — perhaps even more importantly — forward guidance for 2022 has been strong. We believe companies are in a good position to deliver on that guidance.”

“US stocks have led global equity performance for years – but we think Europe will pull ahead in 2022. In the search for reasonable bargains and strong return potential, we think European equities will represent a find in the coming year,” the SSGA analysis said. “With earnings growth in Europe now expected to outstrip the US, we think equity markets are poised to catch up.”

“A wave of infrastructure spending, exemplified by the recent passage of a $1 trillion infrastructure bill in the US, will benefit cyclical sectors including industrial, materials, energy, and financial firms.”

“For equity investors, commodity sectors and cyclicals represent the best hedge against inflation, while higher background volatility can be mitigated by managed-volatility and defensive equity strategies.”

On the question of China, the SSGA analysis remained positive, stating that while China’s growth trend was decelerating, its growth rate would remain abo e that of developed markets.

“Even if annual GDP growth were to slow to a persistent level of 4% to 5%, this would provide a lot of room for companies to grow their earnings at an attractive rate. Moreover, China’s size means that its companies can take advantage of a larger home market.”

“The country remains a large net creditor, and its unique political system means that it has built up a sizable capital base in the form of hard and soft infrastructure,” it said. “China’s equities market appears structurally undervalued. China’s equities-market capitalization is stuck at 82% of GDP, far below that of any developed market.”

“We estimate that market-cap-to-GDP should reach 100% by 2025, driven by new stock issuance and the growth of the current market. In addition, cyclical markers also indicate excessive discounting.”

“Chinese assets retain very low correlation to other markets and maintain excellent diversification features. The pandemic illustrated how much China follows its own economic cycle and its own policy priorities. Limited integration with global financial markets also helps to reduce correlation with other markets.”