Are equity markets too expensive?

Global equities are up a breath-taking 82% from their lows in March last year, with Asian equities clocking an even more impressive 96%1. Nevertheless, Joanna Ong, Head of Investment Solutions from Eastspring Portfolio Advisors (EPA), believes that it is still too early to expect an equity correction on the back of seemingly expensive valuations. This view is premised on the team’s valuation-based equity signal. The indicator, which combines both price-to-book and price-to-earnings measures on a 1-year lagged basis2, suggests that there is no need for alarm, yet. Valuation signals tend to work with a time lag, historically. Hence markets can stay expensive or cheap, as the case may be, for a period of time.

‘We expect business sentiment and corporate earnings to continue to improve” Joanna says, pointing out that the Global Manufacturing Purchasing Managers’ Index remains in expansionary territory and more company earnings are being revised up rather than down.

While the new US fiscal stimulus package is still being finalised, the EPA team expects fiscal and monetary policies to remain supportive of growth. The US yield curve has steepened in recent weeks, reflecting the market’s improved growth and inflation expectations. While inflation may move higher from depressed levels, it is unlikely to trigger any near-term interest rate hikes with the US Federal Reserve probably wanting to see an economic recovery plus evidence that the recovery can be sustained. In addition, as the pace of vaccination picks up and infections fall along with rising temperatures in the western hemisphere, the global economy should continue to normalise.

Despite the potential for near-term market volatility and risks from evolving COVID-19 developments as well as some moderation in investor expectations given the strong recoveries in markets and investor sentiment to date, the EPA team remains positive on equities over the medium term. The team tactically favours the emerging markets which are likely to benefit more from the cyclical recovery. Click here to hear more of Joanna’s recent views on the markets

Global Equity Composite Valuation – Z score lagged by 1 year

Feb Chart of the Month new
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