Equity Market Pulse, Issue 3 – Q1 2015

Equity Market Pulse provides professional investors with insights into global equity market fundamentals and performance at a glance. Spanning developed and emerging markets in the Americas, Europe and Asia, it provides perspective on fundamentals, valuations and investment strategy effectiveness.

The analysis is broken into five themes:

- Growth-Bottom-up analyst growth estimates by region using S&P Capital IQ consensus estimates
- Valuation-Analysis of earnings, sales, and cash flow-based valuations metrics
- Operating Performance-Trends in operating performance including return on equity (ROE) and its components
- Risk/Return-Tracks the dynamics of equity market returns and volatility
- Strategy Returns-Examines the performance of eight common investment strategies employed by global investors

Executive Summary

We see a global earnings lift, reflected in analyst earnings growth estimates for 2015, with Japan, Europe (ex-UK), and Latin America all estimated to move from earnings declines in 2014 to growth in 2015

Japan shows particular improvement, with the highest estimated earnings per share (EPS) growth of all regions, positive EPS revisions and moderate valuations. Market returns in Japan have been rising, while volatility has fallen

EPS revision trends are also rising in emerging Europe (primarily Russia), with trends in the U.S. and emerging Asia remaining stable over the past 12 months

P/E to growth (PEG) ratios still appear reasonable for emerging markets (at or below 1.0) and for developed Europe ex-UK, Japan and developed Asia (at or below 1.5X). However, commodities-rich Canada shows an alarming combination of a 2.0 PEG ratio and a steep projected EPS decline

Europe appears inexpensive relative to other regions on a free cash flow to price basis, with yields ranging from 4.4% to 5.4%. The U.S. and emerging Asia also offer significant cash yields. Multiple expansion continues globally

Of the eight investment strategies we track for this publication, analyst EPS revisions and return on equity take the top spots over the past 12 months. Volatility and small market cap strategies performed the worst. We view this as indicative of increased emphasis on fundamentals, as the global bull market matures