Return on equity - different trends across regions
The US corporate tax cuts from 35% to 21% in early 2018 provided a boost to companies’ profitability: margins improved and, as a result, so did expected return on equity (ROE) from December 2017 to September 2018.
Equity markets derive a significant portion of their sales from the United States: 7% for MSCI EM, 11% for the TOPIX, 17% for the Euro Stoxx and almost 21% for the Stoxx Europe 600. As a result, US tax cuts also marginally benefitted US affiliates of overseas companies.
Since Q4 2018, due to an ageing business cycle, concerns around trade tensions and the negative impact of monetary policies on financials, ROE have been on a downward trend. At 18.2% for the S&P 500 we are still above the 16.7% that prevailed in December 2017 before the corporate tax cuts, but this is not true for Asia including Japan and the euro area, where we are now below December 2017 level. Only Europe as a whole (Stoxx Europe 600) is back to previous level.
Whereas ROE have proved fairly resilient in US financials (around 11.5%), the picture is quite different in other regions.
In Japan, ROE for financials remain the most depressed, around 6.5%. Yet the level has been resilient since the beginning of the year.
In Europe, the trend of ROE for financials has been clearly down and even more so for the euro area as euro-area banks have suffered the most. Financials account for 18.2% of the S&P 500 vs. 19.2% for the Euro Stoxx, but with a much lower profitability: 7.8% vs.11.5%.
In Asia ex Japan ROE of financials have been in a downward trend since H2 2018, but the magnitude has been limited, moving down from 11.1% to 10.5%. Unlike Europe, ROE of financials in Asia ex Japan has been more resilient than in non-financial sectors.
ROE remain at fairly high level on a global basis, but downward pressures are building up. Such pressures are broad based in the US, clustered in financial sectors in the euro area but in non-financial sectors in Asia excluding Japan. We keep our overall neutral stance on equities.