A year for international markets


Easing risks could allow rare overseas relief

US equities have outperformed International for 15 years, in good and bad markets. 2023 is a rare opportunity for overseas markets to shine as macro risks ease and with valuations at a record discount. Asia has both some the best economic growth and cheap valuations. This could drive an Emerging Markets rebound. Europe has plenty of well-priced problems but also supports with its stocks posting 20% sales growth, in the latest Q3. @AsianDragons, @EuropeEconomy.

Fed drives a strong end to November

Equities strong close to November, with overseas markets leading the US. Helped by Fed’ Powell signalling rate hike slowdown to come and China further easing its zero covid policy. US dollar and bond yields fell more. Retailers mixed after relief of a resilient Thanksgiving. CRM slumped as CEO left. Airlines WIZZ and RYAAY positive on outlook. See our 2023 Year Ahead View HERE. See video updates, twitter @laidler_ben.

The ‘Santa rally’ is global

Our analysis of 15 global equity markets shows 1.8% average seasonal performance ‘Santa rally’, a quarter of annual stock market return. Global equities up in 70% of December’s.

China’s covid-easing imperative

China a global wild card for 2023 as world’s 2nd economy only one to pick up as moves to ease zero covid policy and support massive property sector. @ChinaTech and @ChinaCar.

Tech adoption has a long way to go

Tech 40% S&P 500 and tech adoption a long way to go. Helps suppliers and sector early adopters. @CloudComputing, @5GRevolution.

Messages from Apple’s changing supply chain

Apple (AAPL) has one of world’s biggest supply chains. It has slashed its China and US factories, adding significantly to rest of Asia.

Crypto holds relatively firm

Crypto prices stayed resilient to continued FTX bankruptcy fallout. Was helped by lower macro risks as the Fed telegraphed its easier rate hike outlook. DOGE was boosted by TWTR payment integration hopes. Brazil’s Congress approved a crypto regulation framework. Leading exchange Kraken cut 30% of its workforce.

Commodities supported by China and oil

Supported by the weaker US dollar, China zero covid easing, and the EU’s low $60 Russian oil price cap. Base metals copper, aluminium, iron ore helped by the China relief. Precious metals platinum and silver supported by lower global macro risks. EU natural gas prices surged as the cold winter weather finally arrived.

The week ahead: calm before the data storm

1) Oil focus after OPEC meets and EU’s tightened (Mon) Russia sanctions start. 2) US producer prices (Fri) precursor to Dec 13th’s key CPI report. 3) Australia and Canada central banks continue the global rate hike slowdown. 4) AVGO, COST, AZO, GME, LULU, and CHEWY results.

Our key views: A gradual U-shaped recovery

Lower reported inflation and more gradual Fed rate hikes outlook a relief. But sustained market recovery to be gradual and U-shaped. Focus for now on defensive assets like healthcare, styles like dividend yield, and related markets like UK. Until the inflation decline accelerates, de-risking markets, and starts next bull market.

Top Index Performance

1 Week 1 Month YTD
DJ30 0.24% 6.25% -5.25%
SPX500 1.13% 7.99% -14.57%
NASDAQ 2.09% 9.41% -26.74%
UK100 0.93% 3.02% 2.32%
GER30 -0.08% 7.95% -8.53%
JPN225 -1.79% 2.13% -3.52%
HKG50 6.72% 15.56% -20.18%

*Data accurate as of 05/12/2022

Market Views

Fed drives a strong end to November

  • Equities saw a strong close to November, with international markets strongly leading the US. Helped by Fed chair Powell signalling a interest rate hike slowdown to come and China further easing its zero covid policy. The US dollar index and US bond yields fell further. Retailers mixed after relief of resilient Thanksgiving sales. KR results strong and DG weak. CRM slumped as co CEO left. Airlines WIZZ and RYAAY positive on travel outlook. See Page 6 Resource reports and videos. See our 2023 Year Ahead View HERE.

The ‘Santa rally’ is global

  • Much is made of the strong December seasonal performance of S&P 500. But it is much stronger in rest of the world (see chart). Our analysis of 15 global equity markets shows an average ‘Santa rally’ of 1.8%. December makes up fully a quarter of the average annual stock market return. Global equities rose over 70% of December’s.
  • Yet Christmas may already have come early this year. Global equities are up over 15% from October’s lows and increasingly fight Fed’s desire to keep financial conditions tight.

China’s covid-easing imperative

  • China is a global wild card for 2023. World’s 2nd largest economy may be only one to pick up. Is a bulwark against global recession risks, helping those from luxury and materials to Germany and Australia. A China consumer recovery is needed to offset the drags on its manufacturing export powerhouse. @ChinaTech and @ChinaCar.
  • It’s started to ease its self-imposed zero-covid policy and crackdown on its huge property sector. Whilst it’s low inflation rate gives it extra policy flexibility. Its depressed market is sensitive to this.

Tech adoption as a long way to go

  • Tech is 40% of S&P 500 index. Is double weight in rest of world. Has been biggest driver of US’s 13- year outperformance. Today’ tech ‘winter’ driven by lower valuations and pandemic growth payback.
  • Yet analysis of 300,000 US companies shows tech adoption has a long way to go. Is a key support for suppliers across robotics (like ABB), cloud (AMZN), AI (PLTR), and software (ORCL). Tech adoption is also a big dividing line between companies as they grapple with wage and productivity pressures. See @CloudComputing and @5GRevolution.

Messages from Apple’s changing supply chain

  • Apple (AAPL) the world’s largest market cap stock, makes 60% of its $400 billion sales outside US, and has one of the world’s biggest supply chains. It has long published its supplier list and a responsibility report as part of ESG efforts (helping give an above average score on our recently launched metrics).
  • It leads change in supply chains but also shows the limits. It has consolidated and diversified its factories. Slashing its China but also US exposure. In favour of the rest of Asia, but not reshoring ‘hotspots’ Mexico or India. Comes even as China’s global manufacturing share has only kept rising to an estimated 30%, up 5pp in five years.

Average December stock market performance, and % of annual

Crypto highest levels since FTX

  • Crypto’s relative price resilience to FTX contagion continued, with bitcoin (BTC) reaching its highest level since this event. Sentiment was helped by an easing of macro pressure as Fed chair Powell telegraphed slower interest rate hikes ahead.
  • Meme coin Dogecoin (DOGE) was the stand out performer, as hopes that Elon Musk’s recent Twitter (TWTR) takeover would see DOGE payment integrated to the social media platform.
  • Brazil’s Congress approved a crypto regulatory framework. Exchange Kraken cut 30% of work force. ECB said bitcoin on ‘road to irrelevance’.

Commodities supported by China and oil

  • Commodity prices helped by looser zero covid restrictions in China, the biggest commodities buyer, and further US dollar weakness. Also EU setting a low price cap on Russian oil, restricting supply, that comes into effect Dec. 5th. EU natgas price rose strongly on arrival of winter weather.
  • Base metals where China dominates demand, including copper, aluminium, and iron ore, rallied significantly. As the authorities continued to gradually loosen its zero covid policy restrictions in an effort to support the weak economy.
  • Precious metals, led by platinum and silver, also reacted most favourably to dovish statements from Fed chair Powell that interest rate hikes would slow, further weakening the US dollar.

US Equity Sectors, Themes, Crypto assets

1 Week 1 Month YTD
IT 1.87% 10.27% -27.79%
Healthcare 2.24% 6.86% -4.74%
C Cyclicals 1.58% 6.10% -29.37%
Small Caps 1.27% 5.80% -15.70%
Value 0.41% 7.00% -5.22%
Bitcoin 2.73% -15.82% -64.20%
Ethereum 7.28%  -15.16% -65.58%

Source: Refinitiv, MSCI, FTSE Russell

The week ahead: Calm before the storm

  1. A quiet week before Dec. 12 week frenzy of US inflation, FOMC meet and more. Oil will be a big focus after Sunday’s OPEC meeting and with huge uncertainty around impact of Dec. 5th’s new G7 and EU sanctions on Russian oil.
  2. US producer price inflation (Fri), forecast to fall to 6.6%, scrutinized ahead of Dec. 13th’s key November CPI report. China inflation seen at 2.1%, reinforcing the country’s policy flexibility.
  3. Central Banks continue slower pace of interest rate hikes. Australia’ RBA (Tue) seen raising only 0.25% and Canada (Wed) a similar pace.
  4. Company Q3 results led by semis giant AVGO, warehouse club COST, auto part retailer AZO, leading meme stock GME, athleisure LULU, online pet store CHEWY, and China auto LI.

Our key views: A gradual U-shaped recovery

  • Lower reported inflation and more gradual Fed rate hike outlook a investor relief. But sustained market recovery to be gradual and U-shaped with prices sticky and risks still high. 2023 to see more earnings pressure, but less on valuations.
  • Focus on core cheap and defensive assets to be invested in this ‘new’ world, of higher inflation and lower growth, and to manage high risks. Sectors like healthcare, defensive styles like div. yield, and UK to Japan markets. Until inflation decline accelerates, de-risking markets, raising risk appetites, and starting the next bull market.

Fixed Income, Commodities, Currencies

1 Week 1 Month YTD
Commod* -0.39% -2.58% 15.43%
Brent Oil 1.88% -13.50% 9.60%
Gold Spot 3.21% 7.46% -1.04%
DXY USD -1.37% -5.75% 8.90%
EUR/USD 1.38% 5.85% -7.30%
US 10Yr Yld -19.34% -66.92% 198.08%
VIX Vol. -7.02% -22.36% 10.69%

Source: Refinitiv. * Broad based Bloomberg commodity index

Focus of Week: a rare year for international markets

US equities have outperformed International for 15 years, in good and bad markets

Tech-heavy US equities have outperformed overseas markets by over 200% the past fifteen years. This has even continued into this year, as the US economic and dollar resilience has offset its tech sell-off. US equities dominate global equities, making up 65% of the total value. This means that global equities are unlikely to do well if US equities weaken. But they could do very well if the US stabilises and macro risks ease. This is our 2023 base case. The overseas led rally from October lows is a potential dry run for next year. China and emerging markets are cheap and would benefit from the weaker dollar. Europe’s problems are significant, but also very well known, and its globally-focused companies been resilient so far.

2023 is an opportunity for international markets as risks ease and valuations at a record discount

International equities (EFA) have soared in recent weeks, leaving the US lagging behind. As China has eased its zero covid strategy and helped its property sector, and Europe seen peaking inflation and less-bad economic growth. This is a potential preview of next year. Overseas markets would particularly benefit from a combination of lesser macro headwinds, as Fed interest rates peaks and dollar stabilises. Plus, their much lower relative valuations (see chart) and profit margins gives international markets extra opportunity to catch up in 2023. The US’s already full 18x P/E ratio and above average profit margins mean that it is unlikely to lead the next bull market, or that it will be much more modest than in previous recovery cycles.

Asia has both resilient economic growth and cheap valuations and could drive Emerging Markets

China (MCHI) and Japan (EWJ) are the only two economies set to see more economic growth next year than this. Economies are not stock markets, but this is a helpful company tailwind. Both also have well-below average valuations. See @AsianDragons. China is the global wild-card, needing to significantly ease its covid restrictions to support the economy. Japan has many of the advantages of Europe, without the inflation and conflict problems. Emerging markets (EEM) are dominated by Asia and could be a 2023 winner after a decade in the wilderness. They are uniquely exposed to peaking Fed interest rates and a stabler dollar.

Europe has plenty of well-priced problems but also a number of under-appreciated supports

Europe (IEUR) is the closest world region to recession and has a big energy problem driving inflation. Yet valuations are low and its companies global. They grew revenues 20% (excluding energy) in the just reported Q3, way above the growth see in the US. This speaks to the significant policy buffers, from a weak Euro to increased government spending from defence to immigration. It is also particularly exposed to a downside inflation surprise if energy prices fall, or the Ukraine conflict eases. @EuropeEconomy.

US versus Rest-of-World P/E valuation and % discount to the US (10-years)

Key Views

The eToro Market Strategy View
Global Overview The aggressive Fed interest rate hiking cycle and stubborn inflation has boosted uncertainty, recession risk, and hit markets hard. We see this gradually fading, with global growth stressed but resilient, inflation pressure slowly easing, and valuations now more attractive. Focus on cheap and defensive assets for a gradual ‘U-shaped’ market recovery.
Traffic lights* Equity Market Outlook
United States World’s largest equity market (60% of total) seeing slowing but resilient GDP and earnings growth. Valuations led the market rout, and now below average levels, and are supported high company profitability and near peaked bond yields. Fast Fed hiking cycle boosted recession risks. Focus on cash-flows defensives, like healthcare and high dividend. Big-tech supported by defensive growth. See gradual ‘U-shaped’ rebound as inflation slowly falls and de-risks market.
Europe & UK Favour defensive and cheap UK equities (‘Economies are not stock-markets’) over high risk/high return continental Europe. Recession risks high with Russia and energy crisis, threatening to overwhelm ‘buffers’ of rising fiscal spending (defence and refugees), low interest rates (slow to raise ECB), and weak Euro (50%+ sales from overseas). Equities
partly cushioned by lack of tech, and 25% cheaper valuations vs US. Favour cheap and defensive UK over Continent.
Emerging Markets (EM) China, Korea, Taiwan dominate EM (60% wt.), and more tech-centric than US. Positive on China as economy reopens, cuts interest rates, and eases tech regulation crackdown. Valuations 40% cheaper than US and market out of favour. Recovery helps global sectors from luxury to materials. Broader EM needs weaker USD and peak US rates catalyst.
Other International (JP, AUS, CN) Canada and Australia benefit from strong equity market weight in commodities and financials, if global growth resilient and bond yields risen. Japanese equities among cheapest of any major market, benefit from weaker JPY and with low inflation, offsetting structural headwinds of low GDP growth, an ageing population, and world’s highest debt.
Traffic lights* Equity Sector & Themes Outlook
Tech ‘Tech’ sectors of IT, communications, consumer discretionary (Amazon, Tesla), dominate US and China. Hurt by higher bond yields and above average valuations. But structural stories with good growth, high margins, fortress balance sheets support some. ‘Big-tech’ attractive new recession defensives. ‘Disruptive’ tech is much more vulnerable.
Defensives Core positions as macro risks rise and bond yields are better priced. Consumer staples, utilities, real estate attractive defensive cash flows, less exposed to rising economic growth risks, and robust dividends. Offset impact of higher bond yields. Healthcare most attractive, with cheaper valuations, more growth, some rising cost protection.
Cyclicals Higher risk cyclical sectors, like discretionary (autos, apparel, restaurants), industrials, energy, and materials, are cheap and attractive if see a ‘slowdown not recession’ scenario. Are select but high risk opportunities from energy to financials stocks. With often depressed earnings, cheaper valuations, and have been out-of-favour for many years.
Financials Benefits from high bond yields, charging more for loans than pay for deposits. Also one of cheapest P/E valuations, and with room for large dividend and buyback yields. But can be outweighed by high recession risks, with lower loan demand and higher defaults. Banks most exposed. Insurance and Diversifieds (like Berkshire Hathaway) the least.
Themes We favour Value over Growth on GDP resilience, lower valuations, rising bond yields, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return. Secular growth of Renewables and Disruptive Tech investment themes.
Traffic lights* Other Assets
Currencies USD ‘wrecking ball’ driven by rising Fed interest rates and ‘safer-haven’ bid. Many DM currencies hurt by still low interest rates and struggling growth. ‘Reverse FX war’ interventions ineffective. Strong USD hurt EM, commodities, US foreign earners like tech. But helps big EU and Japan exporters. Stabler USD outlook as near top of Fed cycle.
Fixed Income US 10-year bond yields risen above prior 3.5% peak, as Fed hikes continue aggressively and balance sheet runoff accelerates. Set to ease as recession risks rise and inflation expectations fall. Additionally US has a wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, low productivity.
Commodities Strong USD and rising recession fears hitting commodities. But still above average prices helped by GDP growth, ‘green’ industry demand, supply under-investment, recovering China, and Russia supply crisis. Industrial metals and battery materials well positioned. Oil by slow return of OPEC+ supply and Russia 10% world supply problems.
Crypto In the latest ‘crypto winter’ (16th crash for bitcoin) with dramatic and early asset class sell-off and later specific risk events from Luna to FTX. See long term asset class development with small size under $1 trillion, correlations low, regulation growing, development/catalysts continuing – Ethereum merge to proof-of-stake and coming BTC halving.
*Methodology: Our guide to where we see better risk-adjusted outlook. Not investment advice.
Positive Overall positive view, and expected to outperform the asset class on a 12-month view.
Neutral Overall neutral view, with elements of strength and weakness on a 12-month view
Cautious Overall cautious view, and expected to underperform the asset class on a 12-month view

Source: eToro

Analyst Team

Global Analyst Team
CIO Gil Shapira
Global Markets Strategist Ben Laidler
United States Callie Cox
United Kingdom Adam Vettese
Mark Crouch
Simon Peters
France Antoine Fraysse Soulier
David Derhy
Holland Jean-Paul van Oudheusden
Italy Gabriel Dabach
Iberia/LatAm Javier Molina
Poland Pawel Majtkowski
Romania Bogdan Maioreanu
Asia Nemo Qin
Marco Ma
Australia Josh Gilbert


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