With turbulence very evident in geopolitics, most of the world’s largest economies stagnating, and much higher interest rates reducing the appeal of risk assets for many investors, it could easily be forgotten that the IA Global Equity sector is actually up 8 per cent over the year to February 12.
But with global macroeconomic conditions improving, and interest rates likely having peaked, even potentially falling, are we at the point where equities are cheap?
The S&P 500 index of US stocks reached an all-time high of more than 5,000 at the start of February, and within that is the key to understanding whether equities really do represent good value right now, says James Sullivan, head of partnerships at Tyndall.
He says: “The valuation of the equity market is hugely polarised, with the US trading at a significant premium to the rest of the world. The premium it currently commands compared to the MSCI world average is ripe, as high as 40 per cent if considering price to book.
"Some commentators suggest that this is just a magnificent seven phenomenon, and those stocks distort the multiple. This is true to an extent, however stripping them out is not perhaps as material as one might have expected; price to earnings falls from 24x to 21.5x, price to sales falls from 2.7x to 2.2x and price to book 4.7x to 3.8x.”
He says that while it is reasonable for US equities to trade at a premium to other equity markets, he feels the current valuation level is above that stock market’s long-term average, implying that the market is “fully valued”.
Jordan Sriharan, multi-asset fund manager at Canada Life Asset Management, says that if one excludes the returns from the seven large-cap technology stocks, the earnings growth achieved by the rest of the market has been “flat”, and this may explain why that part of the equity market looks expensive.
Evan Brown, head of multi-asset strategy at UBS Asset Management, says the number of questions he gets from clients sceptical of his bullish view on global equities right now is around valuations.
He says: “[They ask], 'don’t high forward price-to-earnings ratios mean that all the good news is already priced in, and stocks will be hard-pressed to make further gains?'
"We believe high multiples are the latest brick in the wall of worry that global equities will climb on their way to fresh all-time highs."
David Jane, a multi-asset investor at Premier Miton, says he believes that outside of the largest technology stocks in the US, equity valuations are “pretty attractive everywhere”.
But he does not feel valuation is the only metric to consider, for two reasons: “The first point is valuation is not a good predictor of near-term performance. Second is down to the unpredictability of earnings and growth near term. What if growth and inflation reaccelerate, what if there is recession?
"Personally, I am influenced by valuation as I think it tells you something about risk; a low valuation and high yield offer a lot of protection against disappointment and vice versa.”
