Citi's positive outlook for global shares doesn't include Australia

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Analysts at Citi expect global stocks to rise in 2017, led by Europe and Japan.

In the bank’s Global Equity Quarterly research note, analysts said they expected equities to rise another 5% by the end of 2017.

Unfortunately, the positive sentiment didn’t extend to Australian stocks, with Citi analysts remaining underweight on the sector.

Citi’s research follows on from a negative view towards Australian shares by investors at last week’s Credit Suisse Asian Investment Conference.

Here’s a table of Citi’s year-end predictions for shares in major global markets (it has some good news – Aussie stocks aren’t going backwards).

Citi likes the look of opportunities in Europe, taking an increasingly common view that maybe Europe has turned the corner. Although the bank has identified the upcoming French election as a political risk, with analysts giving far-right candidate Marine Le Pen a 20% chance of winning.

“With fundamentals improving, valuations reasonable and interest rates still low we upgrade Europe (excluding the UK) to Overweight”.

Japan also features heavily on the bank’s radar. Citi said that Japan’s equity market suffered from a stronger yen in Q1, but it expects Japan to benefit from improved global conditions and near-term weakness in the yen against the US dollar (USD) will boost Japan’s export reliant industries.

Despite emerging market (EM) equities coming to the party in Q1, Citi analysts said that their expectations for a stronger USD will have the opposite effect on EM markets compared to Japan.

This chart showed how emerging markets (including China) have led gains among all asset classes this year, returning almost 12% so far:

On the near-term outlook for EM, Citi said “a strong US$ in 4Q16 meant under-performance, a weaker US$ in 1Q17 meant out-performance. A return of the strong US$ theme, as we forecast for the rest of 2017, would likely prove a drag for EM equities as would any escalation in global trade concerns”.

The bank is neutral on US stocks and that leaves Australia as underweight.

Citi’s tone wasn’t “especially bearish”. It notes that “valuations are starting to look stretched in absolute terms but still look reasonable when compared to low interest rates”. The bank remains underweight as other markets provide better growth opportunities.

Looking ahead, Citi’s equity analysts expect global earnings per share (EPS) to grow 10% in 2017, up from 2% in 2016.

Citi predicted that all major regions will have positive EPS growth this year for the first time since 2010.

Although the MSCI AC World benchmark index currently trades at a historical price-to-earnings ratio of 21x (above the long run average of 17x), positive earnings growth augers well for global markets.

“A major contraction in EPS (-38% in early 2000s and -57% in global financial crisis) was a key driver of the last two global bear markets”, the bank said.

As a bonus chart, here’s the list of Citi’s favourite global stocks in 2017 (hint: there’s no Aussie companies on it).

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