Volatility has ratcheted up across global stock markets in 2022. While much of the market’s attention has been focused on the Fed and its intentions for U.S. monetary policy, James Bristow, long-time portfolio manager of the BlackRock International Fund, has been eyeing up the dynamics that are shaping investment opportunities worldwide.
Here we capture some of his insights and investing inspirations.
1. What stands out to you in terms of monetary policy globally?
There’s a lot of talk about the Fed’s balance sheet, but I think what people forget is that the size of the balance sheets relative to gross domestic product (GDP) is much higher in Japan and Europe. (See chart below.) So, essentially, rates have been even more suppressed in those markets. This means we’re likely to see more accommodative policy relative to the U.S., particularly in Europe where the war in Ukraine and higher energy prices exacerbate concerns about both inflation and an economic slowdown. This is making stocks, and risk assets generally, even more sensitive to changes in rate expectations, and it’s something we’re watching closely.
Central bank balance sheets
Central bank assets as a percent of nominal GDP forecast, 2003-2022
2. What is your outlook for company earnings outside the U.S.?
Interestingly, we saw a very similar speed of profit recovery across all markets following the 2020 margin declines brought on by COVID lockdowns. Yet there has still been a consistent shortfall versus the U.S. in terms of stock performance.
We see some important nuance to that. If you take Europe, for example, and sector-adjust it to the same sector weights as the U.S., the profit gap is actually very small. Hence, we see the issue as one of sector composition, rather than the broadly accepted view that companies outside the U.S. systematically underearn their U.S. counterparts.