>GLOBAL EQUITY STRATEGY: Multiple expansion

■ A slowing growth backdrop . . .
Global earnings growth is set to slow significantly in 2012 as the cycle matures. Further, ongoing public- and financial-sector deleveraging are apt to result in a persistently sluggish economic growth backdrop.


■ . . . with mounting margin pressure
Another implication of the maturing cycle is increased margin pressure. Corporate profit margins have begun to roll over in recent quarters. Historically, these turns have been followed by anaemic earnings growth (which we detail below). In fact, in nearly half of the episodes we examined, earnings contracted over the 3-year period following a peak in profit margins.


■ But multiples can expand
Within economic cycles, earnings growth and valuation multiples typically have an inverse relationship. So while we’re stuck with a lousy growth backdrop, the good news is that multiples do typically rise at this stage of the cycle. Further, the combination of undemanding current valuations and an elevated risk premium lend additional support to the re-rating case.


■ Piecing it together: Total return expectations
We expect global earnings growth in the low-single-digit range over the next few years. Add the current 2.7% dividend yield and some modest multiple re-rating, and it’s not overly demanding to expect total returns in the high single digit range in coming years. This outlook is predicated, of course, on fading cyclical and systematic risks, which would allow the equity risk premium to moderate.


To read full report: EQUITY STRATEGY