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Q1 2014 » Putnam Perspectives
Equity Outlook
Robert D. Ewing, CFA®
Simon Davis
Nick C. Thakore
Shep Perkins, CFA®
Co-Head of U.S. Equities
Co-Head of U.S. Equities
Co-Head of International Equities
Markets post a year for the
record books
Key takeaways
• The U.S. equity market’s 2013 advance was top quartile
by historical measures; our outlook is more tempered
heading into 2014.
• Rarely do we see equities with more homogeneous
valuations than they have today.
• Recovery, restructuring, and emerging-market rebound
potential support the outlook for international stocks.
• A continuing U.S. recovery would provide a helpful
external boost to non-U.S. stock markets.
Earnings
snapshot
After moving sideways
for two years, corporate
earnings may be poised to
reaccelerate.
Annual EPS
growth (%)
12%
Co-Head of International Equities
S&P 500 Index
MSCI EAFE Index
MSCI World Index
8
4
0
2012
2013
1Projected.
Sources: Standard & Poor’s, MSCI.
PROUD
SPONSOR
2014*
A strong fourth quarter and continued economic
growth helped U.S. equities extend their rally
and deliver their best annual performance since
the 1990s. Despite skepticism about the cyclical
recovery and concerns about Federal Reserve
policy and U.S. government fiscal woes, investors
appeared willing to set macroeconomic worries
aside and embrace equities. Throughout 2013,
equity indexes achieved and surpassed their
all-time highs several times, with relatively low
volatility.
The market’s advance was interrupted by only
a few bouts of turbulence, with the most notable
declines occurring in June and October. The
second-quarter downturn followed a Fed policy
meeting that signaled a possible cutback in quantitative easing — the Fed’s monthly bond-buying
program. While anxiety over Fed tapering plans
weighed on equities sporadically throughout
the year, the market responded favorably in late
December when the first modest reduction in
asset purchases was announced. Another notable
market pullback occurred in October — with a
sharp, but brief, decline in response to the congressional budget debate, which led to a 16-day partial
shutdown of the federal government.
Non-U.S. stocks have banner year
With the exception of emerging-market stocks,
non-U.S. stock markets also made substantial
gains in 2013. While some market observers question whether non-U.S. stocks still have room to
run, we see several reasons to believe that these
markets may continue to show strength well into
2014 and possibly beyond. Although interest rates
may continue to rise, modestly higher rates would
still mean we would find ourselves in a historically
low-interest-rate range. Low interest rates are

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Q1 2014 | Equity Outlook
Market scorecard
Outside emerging markets, global stocks uniformly
posted strong returns in 2013.
Select equity index
performance as of 12/31/13
Q4 2013
(cumulative)
1 year
3 years
(annualized)
5 years
(annualized)
10.51%
32.39%
16.18%
17.94%
7.41%
8.66
36.80
16.28
21.77
9.81
10.01
32.53
16.06
16.67
7.58
MSCI World Index (ND)
8.00
26.68
11.49
15.02
6.98
MSCI EAFE Index (ND)
5.71
22.78
8.17
12.44
6.91
MSCI Europe Index (ND)
7.88
25.23
9.89
13.36
7.28
MSCI EM Index (ND)
1.83
-2.60
-2.06
14.79
11.17
Index name
S&P 500 Index
Russell 2500 Index
Russell 1000 Value Index
10 years
(annualized)
Sources: Standard & Poor’s, Russell, MSCI.
U.S. equities
conducive to higher-than-average price-to-earnings (P/E)
multiples — which implies room for stock price appreciation. Furthermore, we believe that coordinated global
growth would generally lead to an increase in corporate
profitability and earnings growth, which would support
stock price appreciation.
While U.S. shares advanced, valuations
became more homogenous
One of the interesting features of today’s U.S. equity
market is that valuations are at an unusual level of parity.
Rarely do we see equities with more homogeneity than
they have today. To put it simply, most stocks are trading
at a price-earnings ratio of around 15x earnings, meaning
that valuations are essentially the same across all market
sectors. This signals an environment in which fundamental
research and bottom-up stock selection become more
critical, and suggests that investors should pay closer
attention to growth potential than to valuation.
Many of the concerns that have hindered global
markets since the financial crisis of 2008 — including the
potential for a prolonged recession in the eurozone,
tensions in the Middle East, and the prospect of Fed policy
error — appear to us to carry less risk today. Of course,
the Fed’s tapering of monetary stimulus may potentially
weigh on markets in early 2014, but our feeling is that
remaining fears of the stimulus going away are overdone.
Opportunities arise as correlations drop
Our research is not revealing any sectors that look extraordinarily attractive, either from a valuation or a growth
perspective. However, we believe investors may benefit
from another notable trend in today’s market: retreating
equity correlations. In the years following the 2008 financial crisis, equity correlations rose to record highs. More
recently, they have declined dramatically and stocks are
performing more independently. As share prices deviate
from each other, fundamentals begin to matter more. This
is an environment, we believe, that demands a researchbased approach to portfolio construction, and one in
which active managers should benefit from the market’s
renewed focus on fundamentals.
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PUTNAM I NVESTM ENTS | putnam.com
A corporate earnings renaissance?
Rising to the challenge of rising rates
After moving sideways for the past two years, U.S.
corporate earnings may be poised for reacceleration in
2014. While the growth is likely to be modest, we believe
investors may be overlooking the potential for improvement. There appears to be a general belief that earnings
are entirely dependent on external factors such as the
Federal Reserve stimulus, and that margins have peaked
with nowhere to go but down. While there is a cyclical
component to earnings, it seems unlikely that margins are
peaking when U.S. hard-goods spending is well below
trend and factory utilization also remains low.
Historically, rising interest rates have posed challenges for
equity investors. However, unless rates begin to move up
quite quickly, we do not expect an overly negative effect
on the market in the near term. The equity market tends
to perform well when short-term rates are rising from
low levels, in part because rising rates typically signal an
improving economy. As for the impact of rising rates on
the housing recovery, it is important to note that even
if mortgage rates rise dramatically from current levels,
housing affordability would still be above average by
historical standards. We are mindful of the risk of an inflationary scare and rates spiking, and that dislocations in
other areas of the market due to interest-rate shifts could
have an indirect impact on the equity market.
If modest global economic growth continues, we
believe margins can move higher from current levels,
and thereby help to push up earnings. Earnings growth
in the third quarter of 2013 was the highest we have seen
since early 2012, and issues that had been weighing on
earnings — such as the double-dip recession in Europe
and slowing growth in China — have abated. Revenue
growth has also shown signs of improvement, and we
believe high-single-digit earnings growth is possible
in 2014.
Foundation remains solid for U.S. equities,
cyclical sectors
When we consider the combination of valuation, fundamentals, and sentiment in today’s environment, we believe
the U.S. equity market’s 2013 advance was rational.
However, this performance was top quartile by historical
measures, and our outlook is more tempered heading into
2014. Equity valuations are at the middle of their historical
range. With stocks at average valuations, our expectation
should be for average returns.
2013 asset flows favored stocks
While sentiment surveys show higher
levels of bullishness, the data on flows
suggest that many investors still have not
returned to equities.
Monthly flows into long-term
open-end mutual funds
$60,000
$40,000
$20,000
$0
-$20,000
-$40,000
U.S. equity funds
International
equity funds
Bond funds
-$60,000
-$80,000
Jan ’13 Feb ’13 Mar ’13 Apr ’13 May ’13 Jun ’13
Jul ’13 Aug ’13 Sep ’13 Oct ’13 Nov ’13 Dec ’13
Source: Strategic Insight.
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Q1 2014 | Equity Outlook
Valuation and earnings yield
Non-U.S. stocks are somewhat cheaper than
their U.S. counterparts.
As of 12/31/13
Index
12-month trailing P/E
12-month forward P/E
Earnings yield
S&P 500 Index
22.21
15.38
1.99%
MSCI EAFE Index
17.23
12.91
3.11
MSCI World Index
19.93
14.36
2.47
Sources: Standard & Poor’s, MSCI.
Non-U.S. equities
Entering 2014, we believe the most attractive
opportunities can be found in cyclical sectors, such
as technology, where stocks offer better growth
characteristics. The least attractive stocks, in our view, are
those in defensive sectors such as telecommunications,
utilities, and staples — areas that investors have embraced
almost exclusively for their yield potential and that have
become too expensive. For dividend-paying stocks, we
believe favoring dividend growth potential over dividend
yield will be beneficial in the current environment. That is,
companies with the potential to grow their dividends may
perform better than those already paying high dividends.
Out of darkness: factors supporting
European market strength
While the recovery in the United States has built
momentum, albeit slowly, since June 2009, Europe until
early 2013 had repeatedly appeared to be on the verge
of disintegration and financial disaster. With a staggering
government debt load, Greece serially flirted with default
and the prospect of departing the eurozone. Unemployment in Spain soared as high as 27%, while 10-year Italian
government bond yields came close to hitting an unsustainable 7.5% in November 2011. The ongoing debate over
northern Europe’s fiscal responsibility in connection with
its flailing neighbors to the south has threatened to derail
policymakers’ attempts to provide bailout funds while
exacting promises of fiscal austerity. So while the United
States slowly built the foundation of its current recovery,
Europe was stalled in comparative economic darkness,
and occasional market rallies were frequently beset by
sharp pullbacks on the renewal of fiscal and political fears.
The stadium is only half full
As confidence in the economy improved and interest
rates rose in 2013, U.S. equity investors appeared to shift
their focus from safety and yield to fundamentals and
valuation. As a result, in the closing quarters of the year,
many stocks in cyclical sectors of the market rebounded
considerably. In our view, this was a positive transition
that may still be in its early stages. Another transition —
in investor sentiment — may also bode well for equities
in 2014. While sentiment surveys show higher levels of
bullishness, the data on flows suggest that many investors
have not yet returned to equities. When the stadium is
only half full, it is unlikely that the game is over, and we
are optimistic about even more asset flows returning to
equities in 2014.
With many and obvious risks to a positive economic
scenario emerging in Europe — and by extension, the
global economy — it took contrarian insight to see that
companies might be oversold relative to their long-term
franchise value. In our research, for example, we found
a variety of high-quality companies that had what we
considered promising growth prospects and strong
longer-term potential. While we thought short-term
macroeconomic data would remain weak and keep
upward pressure on market volatility, we also believed we
could take advantage of a variety of opportunities.
Fast-forward to year-end 2013. Improving economic
data in Europe, along with declining fears over U.S. Fed
tapering and renewed evidence of a path to sustainable
growth in China, lent major support to European equities, particularly in the latter half of the year. In the wake
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PUTNAM I NVESTM ENTS | putnam.com
Other potential tailwinds for
Japanese stocks
of a 25% rise in the MSCI Europe Index through the end of
2013, we are not alone in believing that we may be past
the worst risks for the eurozone and peripheral European
economies.
On balance, we see attractive investment opportunities
in Japan in 2014. Part of our view is based on our belief
that the yen is likely to weaken further due to the Bank
of Japan’s continued efforts to expand its balance sheet.
Earnings growth in Japan, we believe, will be relatively
attractive in a global context, and will be led by exportfocused companies. A tailwind for the Japanese economy
may also arise to the extent that there is economic
improvement in those countries and regions to which
Japan exports its goods.
Looking forward, we expect the European economy
will move more decisively into recovery in 2014, though
there may be temporary setbacks as global markets
navigate the unwinding of quantitative easing in the
United States and as Europe pushes forward with
its own accommodative policy stance. Primarily, our
outlook is made more optimistic by Europe’s progress
in its struggle with sovereign debt issues. As European
countries gradually reduce the intensity of their fiscalausterity programs, there will likely be a weaker fiscal
drag, which should result in better GDP growth, improved
revenue growth for corporations, and better margins for
companies that streamlined their operations during the
period of austerity.
There is also potential upside from Japanese structural
reform, rising wage inflation, and improved domestic
consumption. Japanese structural reform includes a list of
challenging agenda items, such as raising the consumption tax, making changes to employment laws, forging
a transpacific trade pact, and reforming key domestic
industries. Markets are not yet giving credit for progress on these issues, so to the extent the administration
of Prime Minister Shinzō Abe delivers on its ambitions,
markets are likely to respond positively.
Sustained yen weakness, building
economic strength in Japan
Economic recovery and renaissance outside the United
States have not been limited to Europe. The conventional
wisdom with respect to Japan, for example, seems to
be that “Japan is back.” With the MSCI Japan Index (ND)
registering a 55% gain in 2013 in local-currency terms —
and the closest countries tracked by MSCI at 45% (Greece)
and 40% (Finland) — the market clearly found reasons
to cheer Japan’s rise from its multi-decade deflationary
spiral.
Regulatory change and transformative
technologies
While gains in developed market equities in 2013 were
notable, we remain excited about opportunities for
continued growth. Companies in the financials sector have
withstood significant regulatory pressure for the past five
years. While there is a long way to go, we think some of
that pressure has lifted. Over the past 12 months, in fact,
we have seen an inflection point for the global financial
industry, which we believe is facing a horizon of higher
profitability than at any time since the 2008 financial crisis.
While we believe that the Bank of Japan’s extremely
loose monetary policy has the potential to drive up asset
prices even further, we also believe that it may prove
difficult for the Japanese government to implement
the requisite structural adjustments that the economy
needs while simultaneously addressing the nation’s overextended fiscal position. In our view, Japan’s economic
situation will be exacerbated by demographics, as the
workforce is likely to decline by nearly one percent per
year over the next 10 years and with the overall population aging at an unprecedented pace. Hence, we remain
cautious about Japanese equities over the long term,
although we think that in the short to medium term the
policy mix will be supportive of asset-related stocks.
We are also interested in the way companies in a
variety of industries and regions use technology to
streamline operations and deliver products quickly
and efficiently to customers. Automakers offer a good
example, as a number of companies began to see the fruit
of their research and development. Automakers in the
United States and internationally can now deliver new car
models more efficiently and profitably than ever.
At one time, large automakers would have a few dozen
“platforms,” or production frameworks of specific parts,
for each type of car model produced. But with the aid
of better supply-chain-management techniques and
streamlined design where more parts can be shared
among different models, automakers can assemble and
deliver a greater number of car models on fewer platforms
at a lower total cost.
While gains in developed market
equities in 2013 were notable, we
remain excited about opportunities
for continued growth.
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Q1 2014 | Equity Outlook
Emerging markets —
attractive points of entry?
International stock
opportunities proliferate
For the past four years, emerging-market equities have
substantially underperformed their developed-market
counterparts. While some investors continue to shy away
from emerging markets given their uninspiring track
record, we think the prolonged weakness has opened
the door on certain opportunities. China, for example,
is clamping down on corruption and pollution, as well
as slowing its headlong multi-year investment in fixed
assets. As it shifts its economy in the direction of domestic
consumption and the improvement of its citizens’ quality
of life, we think China could offer interesting opportunities
for investors. Sustainable domestic-led growth in China,
in other words, has the potential to command higher
price-to-earnings multiples for Chinese stocks. Assuming
transparency and corporate trustworthiness can improve
as well, Chinese markets would stand to be rated higher
by many market participants.
We feel that international stocks offer broad opportunities to investors at the present time, particularly relative
to U.S. equities and to other asset classes. Earnings recoveries, restructuring opportunities, and emerging-market
rebound potential are all supporting the outlook for international stocks.
We are also constructive on international equities
because we think the U.S. economy will continue to
improve. A continuing U.S. recovery would provide a
helpful external boost to the United Kingdom, Europe,
and Japan, among others. In Japan, we think earnings
growth will continue to accelerate, in large part because
of our expectation of continued yen weakness. Emerging
markets, we believe, will continue to grow, but in our view
are not likely to be the primary drivers of global growth as
2014 gets under way.
There are headwinds in the short term, of course. U.S.
Fed tapering led to substantial outflows from emerging
markets in 2013, though select emerging markets in Asia
and Latin America began to rebound sharply in the latter
portion of the fourth quarter. As tapering gets under way
in 2014, the potential for further capital outflows remains,
so we must wait and see whether these recoveries are
intermittent or can be sustained. On the other hand, the
capital outflows one might expect do imply potential
investment opportunities may arise among long-term
franchise winners. Invariably, some companies will be
unduly punished by recurring bouts of broad-based and
indiscriminate selling of emerging-market assets. In this
context, we believe careful fundamental research can
help investors identify and exploit strong and sustainable
emerging opportunities.
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PUTNAM I NVESTM ENTS | putnam.com
Index definitions
MSCI EAFE Index is an unmanaged index of equity securities from
developed countries in Western Europe, the Far East, and Australasia.
Active management,
fundamental research, and new
insights to capture the growth
potential of equities
MSCI Emerging Markets Index is a free float-adjusted market capitalization
index that is designed to measure equity market performance in the global
emerging markets.
MSCI Europe Index is an unmanaged index of Western European equity
securities.
Equity investing at Putnam features a tenured
and talented team of portfolio managers backed
by an integrated group of research analysts with
worldwide reach. Our research organization
is structured to focus fundamental analysis —
including the fixed-income perspective — on
the factors that matter most in global equity
markets. Putnam research yields insights driving
performance across our U.S. and global equity
portfolios.
MSCI World Index is an unmanaged index of equity securities from
developed countries.
Russell 1000 Value Index is an unmanaged capitalization-weighted index
of large-cap stocks chosen for their value orientation.
Russell 2500 Index is an unmanaged index of those companies in the
small-cap Russell 2000 Index chosen for their growth orientation.
S&P 500 Index is an unmanaged index of common stock performance.
Indexes assume reinvestment of all distributions and do not account for
fees. It is not possible to invest directly in an index.
Simon Davis
Co-Head of
International Equities
Investing since 1988
Joined Putnam in 2000
Robert D. Ewing, CFA®
Co-Head of U.S. Equities
Investing since 1990
Joined Putnam in 2008
7
Shep Perkins, CFA®
Co-Head of
International Equities
Investing since 1993
Joined Putnam in 2011
Nick C. Thakore
Co-Head of U.S. Equities
Investing since 1993
Joined Putnam in 2006

8.
The views and opinions expressed are those of the authors (Simon Davis and Shep Perkins, Co-Heads of International
Equities, and Robert D. Ewing and Nick C. Thakore, Co-Heads of U.S. Equities) as of December 31, 2013, are subject to
change with market conditions and are not meant as investment advice.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations,
economic instability, and political developments. Investments in small and/or midsize companies increase the risk of
greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond
investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the
issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term
bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike
bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return
for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to
prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions.
Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing.
For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or
product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully
before investing.
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