The two markets have lurched from one crisis to another over the past six years, while other developed markets have bounced back from the depths of the financial crisis.
According to FE Analytics, the S&P 500 is up almost 190 per cent since markets bottomed out in March 2009, while the FTSE All Share has gained 145.66 per cent. By comparison, the MSCI Europe ex UK is up 115.04 per cent and the Topix just 65 per cent.
Performance of indices since 3 March 2009
Source: FE Analytics
While both the European and Japanese indices have been in positive territory this year, gaining just over 4 per cent, they have paled in comparison to the US which is up almost 20 per cent.
Performance of indices in 2014
Source: FE Analytics
However, improving outlooks and sentiment in both the eurozone and Japan will provide a significant boost to the country’s equity markets, Bolton (pictured) says, with the effects mostly keenly noticeably in Japan.
“The most favourite market is Japan. Japan is at the cheapest end of its long-term range [of valuations] and … there is a very good chance that due to low expectations eurozone equities could surprise on the upside,” he said.
He says this will be driven by two key themes which have already started to emerge.
“In Japan the key thing to look for is to gage the involvement of domestic investors. The recent market has been very much driven by international investors. In terms of the share of the volume of the share trading, 60 per cent is by investors from abroad.”
“However, we are starting to see the emergence of domestic buying of Japanese equities that could be a major driver of the market, particularly with where earnings are and current valuations.”
“The other thing is what is happening within the corporate sector. We are starting to see companies doing share buybacks and last year 45 per cent of companies increased their dividends. That is the highest level we have seen in six years.”
He expects exporters and financials will particularly benefit from the two trends and see further upside than other sectors and domestic firms.
Europe is slightly less certain, Bolton says, but given current valuations and potential growth in earnings over the next few years he expects considerable re-rating.
“Valuation is important but it is not the only metric that matters, particular in the short time frame. The important thing to remember about Europe is the fall in in earnings expectations. However, next year we are expecting earnings growth.”
“There are three key reasons for that: One is the weaker euro which is certainly beneficial with over 50 per cent of European earnings derived from outside the eurozone. Secondly, the fall in the oil price. Europe as a whole has been a net importer of oil so there is a benefit to consumers. Thirdly, monetary policy which will be continually eased in the eurozone throughout the year.”
The expectation of quantitative easing has excited investors in eurozone equities in recent weeks with several commentators and fund managers telling FE Trustnet they expect the European Central Bank to announce a new programme of asset purchasing in the very near future.
A €315bn fiscal stimulus plan was also announced recently by Jean Claude Juncker, president of the European Commission - the executive branch of the European Union. Both could potentially deliver upside to European equities markets, Bolton says.
“For us, while the impact takes time to come through it will start to benefit markets in 2015. The potential for fiscal stimulus packages – the Juncker plan – which although there is a lot of smoke and mirrors around that – is certainly an appetite for more stimulatory policy and the tightening we have had over the past five years is reducing.”
While Bolton is not pessimistic on the US economy as it faces a likely rate rise and strong dollar in 2015 he thinks gains in the stock market will be muted in comparison to this year’s 20 per cent rise.
“The US is pretty fully valued. That story of re-rating over the past few years has gone about as far as it can do. On a valuation basis it is at the top end of the matrix and the eurozone is in the middle of its long-term range. Japan is at the bottom of its range.”
“We are not expected negative returns from the US but mid to low-single digits is the best to expect.”
