December 2024
Global Market Pulse (EURO)
Leveraging expertise from the MFS Market Insights team to provide timely perspectives on economic and market dynamics that are top of mind for clients.
Market Insights Team
KEY TAKEAWAYS
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Economy & Markets
Economy & Markets
| Diverging Productivity
Poor productivity hampers European competitiveness MFS PERSPECTIVE
- Productivity, measured as output per employee, is a component of future economic growth and profitability.
- The widening gap between the eurozone and US illustrates the challenges facing Europe.
- Wage growth and living standards tend to lag in less productive economies.
| Interest Rate Divergence
Higher US Treasury yields reflect improved growth prospects MFS PERSPECTIVE
- Higher real rates typically signal improved growth expectations, but they can also reflect a deteriorating fiscal outlook.
- Expectations for faster growth have driven US yields higher since the election.
- Eurozone growth risks are skewed to the downside, resulting in downward pressure on rates.
| Dollar Outlook
Several dynamics are coming together to bolster the dollar MFS PERSPECTIVE
- With pro-growth policies on the horizon, the dollar continues to strengthen as US economic growth is expected to improve.
- Still-sticky inflation may slow the pace of US rate cuts while other central banks continue easing, widening rate differentials, boosting the dollar.
- A strong USD can create opportunities in international equities.
| US Equity
US small caps rallied on improved growth outlook and lower rates MFS PERSPECTIVE
- Lower tariff exposure, given their domestic sales concentration, and reduced regulation should be earnings positive for US small caps.
- Small caps benefit more from rate cuts due to higher exposure to floating rates.
- Despite lower debt levels, non-US small caps could struggle in the face of slower growth outside the US.
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Global Developed Equity
Global Developed Equity - US
Euro basedUS 
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
- US equities rallied after the US election amid hopes for lower corporate taxes, a lighter regulatory burden and further pro-growth policies.
- November through January has historically been a strong period for equity performance and current conditions appear supportive.
- While valuations remain well above long-term averages and concentration remains a risk, support for equities such as earnings beats and investor inflows remain intact.
- In a modest broadening of the market, financials and industrials joined consumer discretionary and technology as the top performers over the past three months.
MFS CONSIDERATIONS LARGE CAP - S&P 500 valuations remain elevated at over 21 times NTM earnings and a P/S ratio of 3x.
- Earnings growth remained healthy at nearly 6% in Q3, the fifth consecutive quarter of growth, according to FactSet.
- Expectations of new tariffs and changing trade policies pose a significant risk to large caps through higher costs and potential retaliatory tariffs.
SMALL/MID CAP - The recent rally in Russell 2000® has elevated the PE ratio to 27 times NTM earnings, but positive economic and policy developments are supportive
- Small caps are becoming more appealing as sustained positive economic data point to a soft, or no, landing.
- As rates fall, small and midcaps should benefit from a lower cost of capital.
GROWTH - Growth continues to lead the market higher, rising 31% on the year through late November.
- With high expectations reflected in multiples, investors may want to be increasingly discerning, considering the Russell 1000® Growth’s lofty PE of 29 times NTM earnings.
VALUE - A recent rotation has resulted in strong performance in more value-oriented sectors, including financials, utilities and industrials.
- Healthy consumer finances and lower interest rates should continue to support financials.
- We don’t see the same concentration or valuation risk in value-oriented equities that we see in growth-oriented ones.
Global Developed Equity - Ex US
Euro based• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
EUROPE EX UK 
- Core Europe continues to struggle, driven by weak sentiment and political uncertainty.
- Valuations look very reasonable and reflect the negative outlook for the region.
- Growing interest rate and growth differentials imply continued euro weakness.
M F S C O N S I D E R A T I O N S - We expect gains to be in line with dividends and earnings, with the latter being hurt by weak Chinese demand.
- Germany faces stiff competition from Chinese exports.
- Potential catalysts include a Ukrainian peace deal and German fiscal stimulus.
UK
- The recent Labour budget increased taxes and spending but offers no major increase in investment.
- Inflation is proving more stubborn than anticipated.
- PMIs surprised to the downside, particularly for the services sector.
M F S C O N S I D E R A T I O N S - While we recognize that the macro environment remains challenging, our neutral bias mainly reflects a favorable valuation backdrop.
JAPAN
- Despite yen weakness, the specter of tariffs is weighing on Japan’s export sector.
- Domestic demand growth remains strong on the back of rising wages.
- Potential tax cuts could boost sentiment.
M F S C O N S I D E R A T I O N S - Continued corporate governance reforms are supporting increased cash returns to shareholders
- Continuing dollar strength could weigh on returns for USD-based investors.
- The pace of Bank of Japan policy normalization could be a risk if faster than expected.
-
Emerging Markets
Emerging Markets
Euro based• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
EM EQUITY
- USD strength is expected to be an ongoing headwind as are rising trade tensions.
- China’s recent policy announcements have provided stability, but more reform is needed to drive consumption.
- North Asia is facing a semiconductor slowdown, while India’s long-term structural drivers remain intact.
M F S C O N S I D E R A T I O N S - Against an uncertain international backdrop, selectivity is especially important.
- Valuations remain undemanding and further Chinese stimulus will be supportive for SE Asia.
EM DEBT - HARD CURRENCY
- Fundamentals have deteriorated recently, mainly reflecting greater fiscal risks.
- The valuation backdrop remains favorable on a total-yield basis, despite tight spreads.
- Technicals remain robust.
- Be mindful of global risks, ranging from Trump 2.0 to geopolitics to China’s structural headwinds.
M F S C O N S I D E R A T I O N S - Contrary to initial concerns, EM debt has shown remarkable resilience in the wake of the US election.
- With total yield valuation still compelling, EMD remains attractive.
- However, given significant risks, country selection will be key.
EM DEBT - LOCAL CURRENCY 
- Global policy easing, progress towards disinflation and relatively high real rates all act as positive drivers.
- While the asset class is highly sensitive to global factors, its main source of risk comes from the strength of the US dollar, which is not relevant in EUR terms.
- Under Trump 2.0, EM currencies may outperform the EUR in the period ahead.
M F S C O N S I D E R A T I O N S - A more tactical asset class by nature given its higher volatility, mainly reflecting the currency risk.
- But the combination of high local rates and robust prospects for EM FX in EUR terms makes it an attractive asset class for investors with high-risk appetites.
BLANK
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Global Fixed Income
Global Fixed Income
Euro based• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
USD DURATION 
- A soft landing, progress towards disinflation, along with further potential Fed rate cuts are generally supportive of long duration.
- However, the impact of Trump 2.0 may complicate the rate outlook given growing concern over the potential inflationary effects of the new policy mix.
MFS CONSIDERATIONS - The outlook for rates is no longer firmly skewed to the downside.
- While policy rate pricing appears too conservative, we’ve moved to a neutral duration stance, reflecting renewed inflation concerns.
EURO DURATION * 
- Amid ongoing ECB rate cuts, a moderating inflationary trajectory and a challenging growth backdrop, the stars appear aligned for long duration in the eurozone.
- Core eurozone economies face major growth headwinds, especially in Germany and France.
M F S C O N S I D E R A T I O N S - With the balance of risks skewed towards accelerated ECB policy easing, the case for long duration is compelling.
US IG CORP 
- The macro backdrop remains positive, with a high probability of a soft landing. Fundamentals, while off post-COVID peaks, remain respectable, especially after recent margin and free cash flow improvements.
- However, spread valuations remain challenging, making overall valuations less attractive compared with other global fixed income sectors.
M F S C O N S I D E R A T I O N S - While the outlook for total returns remains constructive, the risk/reward is not as compelling as for other asset classes, mainly reflecting tight valuations, which keep us cautious.
US HIGH YIELD
- Fundamentals remain robust, helped by historically low levels of leverage and strong free cash flow generation.
- Other positive drivers include low default rate projections, attractive breakeven yield valuation and a supportive macro outlook.
M F S C O N S I D E R A T I O N S - The risk/reward may be attractive for investors considering deploying credit risk exposure.
- While we are not concerned about a maturity wall, spread valuation looks stretched, so security selection is key.
EURO IG CORP 
- Sound fundamentals are supportive, as are a fixed income–friendly macro environment and robust technicals.
- The ECB easing cycle is likely to boost investor sentiment towards EUR credit.
- While the spread valuation backdrop has become more challenging, spreads remain cheaper than in the US.
M F S C O N S I D E R A T I O N S - Based on our assessment of fundamentals, valuation and technicals, we believe that this is one of the most attractive opportunities across global fixed income.
EURO HIGH YIELD
- The macro backdrop and strong fundamentals, including favorable net leverage, support the asset class.
- Breakeven yields remain attractive.
- The appetite for riskier assets in the region is likely to benefit from the ongoing ECB easing cycle.
M F S C O N S I D E R A T I O N S - The asset class has shown resilience and remains attractive for the investor with high risk tolerance.
- Security selection remains key, given the dispersion of fundamental stories at the security level.
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The Global Market Pulse leverages the firm’s intellectual capital to provide perspective on broad market dynamics that are top of mind for asset allocators. We celebrate the rich diversity of opinion within our investment team and are proud to have talented investors who may implement portfolio positions and express different or nuanced views to those contained here, which are aligned to their specific investment philosophy, risk budget and entrusted duty to allocate our client’s capital responsibly.
The views expressed herein are those of the MFS Investment Solutions Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as MFS’ investment advice, as portfolio positioning, as securities recommendations, or as an indication of trading intent on behalf of MFS.
Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Frank Russell Company ("Russell") is the source and owner of the Russell Index data contained or reflected in this material and all trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell's express written consent. Russell does not promote, sponsor or endorse the content of this communication.
“Standard & Poor’s®” and S&P “S&P®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.
These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.
Economy & Markets
| Diverging Productivity
| Poor productivity hampers European competitiveness |
MFS PERSPECTIVE
|
| Interest Rate Divergence
| Higher US Treasury yields reflect improved growth prospects |
MFS PERSPECTIVE
|
| Dollar Outlook
| Several dynamics are coming together to bolster the dollar |
MFS PERSPECTIVE
|
| US Equity
| US small caps rallied on improved growth outlook and lower rates |
MFS PERSPECTIVE
|
Global Developed Equity - US
Euro based
| US |
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
|
| MFS CONSIDERATIONS |
| LARGE CAP |
|
| SMALL/MID CAP |
|
| GROWTH |
|
| VALUE |
|
Global Developed Equity - Ex US
Euro based
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| EUROPE EX UK |
- Core Europe continues to struggle, driven by weak sentiment and political uncertainty.
- Valuations look very reasonable and reflect the negative outlook for the region.
- Growing interest rate and growth differentials imply continued euro weakness.
| M F S C O N S I D E R A T I O N S |
- We expect gains to be in line with dividends and earnings, with the latter being hurt by weak Chinese demand.
- Germany faces stiff competition from Chinese exports.
- Potential catalysts include a Ukrainian peace deal and German fiscal stimulus.
| UK |
- The recent Labour budget increased taxes and spending but offers no major increase in investment.
- Inflation is proving more stubborn than anticipated.
- PMIs surprised to the downside, particularly for the services sector.
| M F S C O N S I D E R A T I O N S |
- While we recognize that the macro environment remains challenging, our neutral bias mainly reflects a favorable valuation backdrop.
| JAPAN |
- Despite yen weakness, the specter of tariffs is weighing on Japan’s export sector.
- Domestic demand growth remains strong on the back of rising wages.
- Potential tax cuts could boost sentiment.
| M F S C O N S I D E R A T I O N S |
- Continued corporate governance reforms are supporting increased cash returns to shareholders
- Continuing dollar strength could weigh on returns for USD-based investors.
- The pace of Bank of Japan policy normalization could be a risk if faster than expected.
Emerging Markets
Euro based
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| EM EQUITY |
- USD strength is expected to be an ongoing headwind as are rising trade tensions.
- China’s recent policy announcements have provided stability, but more reform is needed to drive consumption.
- North Asia is facing a semiconductor slowdown, while India’s long-term structural drivers remain intact.
| M F S C O N S I D E R A T I O N S |
- Against an uncertain international backdrop, selectivity is especially important.
- Valuations remain undemanding and further Chinese stimulus will be supportive for SE Asia.
| EM DEBT - HARD CURRENCY |
- Fundamentals have deteriorated recently, mainly reflecting greater fiscal risks.
- The valuation backdrop remains favorable on a total-yield basis, despite tight spreads.
- Technicals remain robust.
- Be mindful of global risks, ranging from Trump 2.0 to geopolitics to China’s structural headwinds.
| M F S C O N S I D E R A T I O N S |
- Contrary to initial concerns, EM debt has shown remarkable resilience in the wake of the US election.
- With total yield valuation still compelling, EMD remains attractive.
- However, given significant risks, country selection will be key.
| EM DEBT - LOCAL CURRENCY |
- Global policy easing, progress towards disinflation and relatively high real rates all act as positive drivers.
- While the asset class is highly sensitive to global factors, its main source of risk comes from the strength of the US dollar, which is not relevant in EUR terms.
- Under Trump 2.0, EM currencies may outperform the EUR in the period ahead.
| M F S C O N S I D E R A T I O N S |
- A more tactical asset class by nature given its higher volatility, mainly reflecting the currency risk.
- But the combination of high local rates and robust prospects for EM FX in EUR terms makes it an attractive asset class for investors with high-risk appetites.
BLANK
Global Fixed Income
Euro based
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| USD DURATION |
- A soft landing, progress towards disinflation, along with further potential Fed rate cuts are generally supportive of long duration.
- However, the impact of Trump 2.0 may complicate the rate outlook given growing concern over the potential inflationary effects of the new policy mix.
| MFS CONSIDERATIONS |
- The outlook for rates is no longer firmly skewed to the downside.
- While policy rate pricing appears too conservative, we’ve moved to a neutral duration stance, reflecting renewed inflation concerns.
| EURO DURATION * |
- Amid ongoing ECB rate cuts, a moderating inflationary trajectory and a challenging growth backdrop, the stars appear aligned for long duration in the eurozone.
- Core eurozone economies face major growth headwinds, especially in Germany and France.
| M F S C O N S I D E R A T I O N S |
- With the balance of risks skewed towards accelerated ECB policy easing, the case for long duration is compelling.
| US IG CORP |
- The macro backdrop remains positive, with a high probability of a soft landing. Fundamentals, while off post-COVID peaks, remain respectable, especially after recent margin and free cash flow improvements.
- However, spread valuations remain challenging, making overall valuations less attractive compared with other global fixed income sectors.
| M F S C O N S I D E R A T I O N S |
- While the outlook for total returns remains constructive, the risk/reward is not as compelling as for other asset classes, mainly reflecting tight valuations, which keep us cautious.
| US HIGH YIELD |
- Fundamentals remain robust, helped by historically low levels of leverage and strong free cash flow generation.
- Other positive drivers include low default rate projections, attractive breakeven yield valuation and a supportive macro outlook.
| M F S C O N S I D E R A T I O N S |
- The risk/reward may be attractive for investors considering deploying credit risk exposure.
- While we are not concerned about a maturity wall, spread valuation looks stretched, so security selection is key.
| EURO IG CORP |
- Sound fundamentals are supportive, as are a fixed income–friendly macro environment and robust technicals.
- The ECB easing cycle is likely to boost investor sentiment towards EUR credit.
- While the spread valuation backdrop has become more challenging, spreads remain cheaper than in the US.
| M F S C O N S I D E R A T I O N S |
- Based on our assessment of fundamentals, valuation and technicals, we believe that this is one of the most attractive opportunities across global fixed income.
| EURO HIGH YIELD |
- The macro backdrop and strong fundamentals, including favorable net leverage, support the asset class.
- Breakeven yields remain attractive.
- The appetite for riskier assets in the region is likely to benefit from the ongoing ECB easing cycle.
| M F S C O N S I D E R A T I O N S |
- The asset class has shown resilience and remains attractive for the investor with high risk tolerance.
- Security selection remains key, given the dispersion of fundamental stories at the security level.
BLANK
The Global Market Pulse leverages the firm’s intellectual capital to provide perspective on broad market dynamics that are top of mind for asset allocators. We celebrate the rich diversity of opinion within our investment team and are proud to have talented investors who may implement portfolio positions and express different or nuanced views to those contained here, which are aligned to their specific investment philosophy, risk budget and entrusted duty to allocate our client’s capital responsibly.
The views expressed herein are those of the MFS Investment Solutions Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as MFS’ investment advice, as portfolio positioning, as securities recommendations, or as an indication of trading intent on behalf of MFS.
Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Frank Russell Company ("Russell") is the source and owner of the Russell Index data contained or reflected in this material and all trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell's express written consent. Russell does not promote, sponsor or endorse the content of this communication.
“Standard & Poor’s®” and S&P “S&P®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.
These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.
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