Edison Strategy

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Alastair George

Alastair George
Strategist


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Valuations: An important part of the puzzle

In this cycle valuations have been, so far, the dog that did not bark. Globally, the median sector price/book multiple has risen from the trough of 2008 to a new peak. Such an expansion in market valuations is similar to that seen in the 1980-1987 period. Between 2012 and today we have come full circle in terms of tactical asset allocation. Earlier, we could not understand why investors were so uninterested in adding risk to portfolios despite such high expected returns in equities. Now, equity valuations suggest only modest long-term returns are on offer and there is greater prospect of short-term disappointment. It is however proving equally difficult to attract investors’ interest in this signal for caution. Perhaps the metaphorical - and silent - valuation dog knows the psychology of the current marginal investor rather too well.

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26/10/2017
Illumination: Equity strategy and market outlook October 2017
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In this month’s strategy piece, Alastair George believes that 2018 brings into view the prospect of a net decrease in central banks’ balance sheets, and that the winding down of policies that were statistically shown to depress risk premia in fixed income and credit markets should not be ignored. The US Fed has offered ample guidance in terms of balance sheet reduction, but the surprise may be on the other side of the Atlantic as economic activity has rebounded strongly in the eurozone, yet interest rates remain negative and the ECB risks getting behind the curve. During 2017, markets have pushed further into their low-volatility/low-return regime. Volatility has declined faster and further than at any time since the 1970s. We view this as a temporary phenomenon likely to reverse as volatility returns to interest rate markets during 2018. We maintain a cautious outlook for the medium term on the basis of valuations that indicate very low expected returns in both equities and credit in developed markets. To deliver returns, active investors may need to combine a relatively modest level of market exposure with carefully selected exposure to specific company- or event-driven situations.
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21/09/2017
Illumination: Equity strategy and market outlook September 2017
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In this month’s strategy piece, Alastair George believes resilient forecasts for profits growth in 2017 keep the equity bears at bay in the short term. Though a modest degree of weakness in consensus earnings forecasts has appeared recently, earnings growth for developed markets is still forecast to be close to 10% in 2017. However, valuations across credit and equity markets highlight the need for caution for the medium term. Risk premia remain, in our view, compressed by central bank policy and are at levels that are unusually low on a historical basis. For the euro, it is perhaps a Goldilocks era as the strength of the currency taps the brakes on exporting nations, allowing other eurozone members, where there is less inflationary pressure, to remain beneficiaries of ultra-loose monetary policy for longer. We expect the ECB to aim to maintain the euro close to current levels. We continue to believe portfolios should be cautiously positioned.
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31/08/2017
Equity strategy and market outlook August 2017
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In this month’s strategy piece, Alastair George believes that the record levels of corporate profitability observed since the financial crisis are the key drivers behind currently high equity valuations. At the same time, the labour share of GDP has been declining as wage growth remains muted. In part, this profitability phenomenon is structural, due to factors such as globalisation and declining union power. Shorter-term cyclical factors such as high developed-market unemployment levels are also important. The benefits from structural factors are now largely in the rear-view mirror and furthermore US cyclical wage pressure appears to be on the increase. He therefore believes profit forecasts are unlikely to surprise to the upside and remains cautious on developed market equities.
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27/07/2017
Equity strategy and market outlook - July 2017
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In this month’s strategy piece, Alastair George believes that good times to invest are when there are a multitude of ways to win and limited downside. At present, however, the bull case for equities seems to be increasingly based on a single ‘Goldilocks’ scenario contingent on the persistence of high equity valuations, easy monetary policy and low volatility. The path for even adequate returns on equities therefore seems rather narrow at present. This absence of upside, rather than any specific downside trigger is, in his view, sufficient reason to run portfolios at below benchmark risk levels.
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29/06/2017
Equity strategy and market outlook June 2017
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In this month’s strategy piece, Alastair George believes that, judging by the market reaction to ECB President Draghi’s most recent comments, a tipping point may have been reached. Peak monetary accommodation is now in the rear-view mirror and investors are becoming increasingly worried about tightening policy. We believe this adds weight to our cautious view on global equities but investors should also consider that overly pessimistic forecasts for an aggressive quantitative tightening could ultimately prove wide of the mark. There is a distinction between headwinds and hurricanes and we do not believe policy error should be the base case at this stage.