Although global equities’ valuations look high they are more reasonably priced when bond yields are factored in, according to NN Investment Partners.
Based on 12-month forward earnings, equities globally are currently at 16.5 versus a period average of 14.1 and close to the highest valuations seen over the past 15 years. The cyclically-adjusted PE in the US is 15% above its long-term average and at its average in the Eurozone.
However, when compared with the returns offered by bonds, equities look more fairly priced. For example, the global equity risk premium is just above 4% versus US treasuries, which is close to average on an historical basis.
Patrick Moonen, Principal Strategist Multi Asset, NN IP, commented: “Equity valuations are up for interpretation. In an absolute sense we cannot pretend that equities are cheap but the picture becomes very different if we throw the level of treasury yields into the equation.
“Given the rise in earnings that equities are delivering, there is scope for them to absorb higher bond yields, provided these are justified by an improving outlook and move higher in a gradual way.
“Looking forward, the fundamentals for equity markets remain supportive. Second quarter earnings growth has been strong with European and Japanese earnings rising more than 25% and US earnings also growing close to 10%. The earnings outlook for this and next year is also pointing towards double-digit growth numbers with especially the US (+11.3%) and Emerging markets (+11.5%) standing out.”