Corporate earnings staging a comeback overseas

Earnings growth in international markets has been hard to find in recent years. Average earnings for companies in the MSCI EAFE Index registered a 2.6% drop in 2015 and a slightly better but still negative 0.2% result in 2016.¹ This lack of progress on the earnings front has been a key headwind for international markets, despite accommodative central banks and other signs of growth. That may now be changing, say bottom-up managers in our asset management network.

With roughly 50% of companies reporting results for the quarter so far, earnings for MSCI EAFE companies are up a remarkable 35.8% year over year. International equity managers in our network point to several key themes emerging from the data.First, industrials are leading the pack across markets. This is encouraging because industrials are a key growth engine for international markets and the second-largest sector by market cap as measured by its 14% weight in the MSCI EAFE Index.¹Second, commodity-related sectors are seeing a bounce and are likely stabilizing. Falling commodity prices since 2014 have depressed earnings from commodity producers, and they're finally seeing a year-over-year rebound. Third, the consumer discretionary sector is seeing healthy results. Consumer discretionary is the third-largest sector in the MSCI EAFE Index and it's leveraged to the improving global growth picture that we've seen develop over the past few months. As economic growth and consumer confidence improve, consumer spending should follow suit.

Bottom-up corporate fundamentals are only one piece of the puzzle for international equities; however, in a world where investor sentiment can easily be swayed by geopolitical events, corporate fundamentals may very well be the most important pillar to a sustained market recovery. Today, we tend to side with the bottom-up portfolio managers in our asset management network who are increasingly optimistic on the outlook for corporate fundamentals and who are finding an attractive mix of improving growth and relatively favorable valuations overseas. Now may be a good time for investors to give a second look to this long-overlooked asset class.

1 MSCI, 3/31/17.

The MSCI Europe, Australasia, and Far East (EAFE) Index tracks the performance of publicly traded large- and mid-cap stocks of companies in those regions. It is not possible to invest directly in an index.

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