14 November 2017 · 3 min read

Valuations: An important part of the puzzle

Price/book multiples highlight worrying trend in risk appetite

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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2 November 2017 · 5 min read

Government bonds in the firing line

The next twist in the story is likely to push global yields higher

It is always important to put aside preconceptions and let all the data speak – and not just that which confirms prior beliefs. At present, the data which best models the long-term outlook (valuations) are suggestive of relatively weak returns in global equities and this has informed our cautious positioning. Furthermore, bond yields and interest rates remain unusually low on a historical basis. Yet for the short-term, economic surprises are currently positive, business sentiment strong and profits growth relatively robust. It is this short-term data which also needs to be heard.

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19 October 2017 · 1 min read

Profits forecasts stable – but no positive surprises

Stronger PMI indices not following through to profits growth

While Q3 has brought something of a renaissance in economic surprise and purchasing managers’ indices we can at present see no sign of this improved sentiment in profits forecasts for 2017. Our weighted average consensus earnings forecast index remains steady for each of the UK, US and Europe ex-UK and the equal-weighted measures have declined, if modestly, since mid-year. In prior periods, our earnings forecast index tended to move slightly ahead of PMIs and economic surprise. The more recent data has not followed this pattern and highlights that what is good for the overall economy is not by necessity good for corporate profits. Furthermore, with central banks on a tightening path the risk for equity markets is that tighter policy is not offset by stronger profits growth.

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9 October 2017 · 3 min read

Economic data surprising to the upside in Q3

Strong PMI indices add weight to the case for tighter monetary policy

While valuation concerns for equity markets remain in place, recent economic data in the US and eurozone also points to something of a mini-surge in economic momentum over the last 3 months. PMI data has been coming in ahead of expectations and economic surprise indices have turned higher in all regions. During 2017, investors have had to balance their longer-term valuation concerns with generally robust profits growth and improving economic sentiment. While soft data such as PMI indices should not significantly shift portfolio asset allocations, a hiccup before the end of the year is now looking less likely.

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28 September 2017

Earnings momentum – 2017 forecasts drifting slowly lower

Weakening trend in 2017 revisions indices evident since mid-year

One of the key drivers of equities during H1 2017 was the relatively strong level of earnings momentum in each of the US, UK and continental Europe. This was in some respects a carry-over from the surge in positive sentiment towards the end of 2016 but which now appears to have run its course. It is easy to forget that as recently as 18m ago, investors were anticipating a major calamity in China’s economy, sharply impacting sentiment in the basic industry and other cyclical sectors which in the event did not occur. However, the data now highlight a modestly declining trend in 2017 earnings forecasts since mid-year, even as economic sentiment remains robust.

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26 September 2017

If you think it is quiet… it is.

Lowest levels of daily volatility since the 1970s for developed markets

In June we highlighted the low level of volatility in global equity markets. This low volatility regime has continued through the summer and, as Exhibit 1 shows, now represents a dramatic and sudden break with 2016. For the Datastream developed markets index, if measured by the percentage of days with a greater than 25bps close-to-close daily move, the summer of 2017 represents the quietest period for developed markets since inception of the index in 1973. Investors should perhaps consider that market volatility is on average 50% above current levels when building portfolios for the longer-term.

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