Global equity markets are in for a tough year throughout 2016 as weak corporate profitability takes its toll, according to BNP Paribas.
BNP Paribas' Global Markets Strategy Outlook: Year Ahead 2016 predicted "choppy equity market behaviour in 2016".
"Global equities [will] be impacted by weak corporate profitability as global productivity growth remains weak and global trade continues to worsen into 2016, weighing on wage growth and investment spending," said the report.
However, the spread of equity yields over credit and sovereign bonds will continue to boost equity income demand, said BNP Paribas.
"While real money investors are uncomfortable with equity market volatility, investors are and will remain very focused on yield and thus invest in quality equity income strategies, on both an outright and a hedged basis," said the report.
Breaking down global equities into specific markets, BNP Paribas said US equities will deliver a poor performance in 2016 due to weaker export and export revenues coupled with the stronger US dollar.
"US earnings per share are too high relative to revenues, and the higher cost of borrowing (through the recent credit spread widening) will likely hamper M&A and reduce the level of buybacks, both of which have boosted EPS in the past," said the report.
Emerging market equities will continue to trade at weak levels, driven by a further deterioration in growth – although a lot of downside is already in the price, said BNP Paribas.
European equities are the "most attractive" asset class, particularly versus US equities, said the report.
"Versus US equities, European equities offer higher earnings yields, stronger revenues versus earnings per share and the potential for further ECB QE expansion by the year end," said BNP Paribas.
"That said, ongoing EM underperformance will continue to drive weakness in European names with EM exposure (Germany alone generates seven per cent of its GDP from exports to non-European and EM countries).
"Japanese equities will continue to be supported by weak oil prices, a weaker Japanese yen and weak wage growth," said BNP Paribas.
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