Rudi's View | Nov 14 2024
By Rudi Filapek-Vandyck, Editor
Global equities have been climbing the wall of worry for ten long months in 2024 with elevated valuation multiples in particular triggering calls for an imminent correction, if not the inevitable bursting of the so-called 'everything bubble'.
Instead, all-time records have been broken and bettered, again and yet again. The S&P500 index in the US has set a new record 51 times so far this year, turning 2024 into the best year for US equities since 1997 (so far), generating the 12th best return since 1928 (first ten months).
That recent rally upon confirmation of a decisive outcome in the US election has pushed equities beyond all kinds of valuation measurements that already looked quite stretched when it started. Consider, for example, the yield on US ten year bonds is now higher than the average dividend yield for US equities... for the first time in 22 years.
That tipping point was reached this month as the yield for US shares sank to a ten-year low. The Equity Risk Premium, which pits equities against bond yields, has now fully vanished, leading some commentators to highlight investors are now paying up to take on (equity) risk instead of getting paid for it.
The sentiment was reflected in this month's Global Investment Manager's Index from S&P Global Market Intelligence which showed risk appetite at its highest level since April 2021, led by North American investors, "the mood sours toward defensives".
Digging into the finer details, it turns out, with the sole exception of April 2021, risk appetite has never been as high as this month in the four-year history of this survey.
Offsetting general unease with where markets are in November, valuation-wise, is the observation that whenever equity indices are up by 20% or more by this time in the calendar year, there are usually still more gains to be had into year-end. It appears the opposite holds true as well in case equities are by now down in excess of -20%.
Added observation: back in 2021 the added gain was 1.37% only, while in 2019 the US market advanced another 4.45%.
Experience tells us the local market does not by default match the US markets, but whatever happens over there remains all-important for what happens on the ASX.
One of the other observations that is receiving quite a lot of attention recently is the wide gap in valuation between US equities and the rest of the world.
The following observation is from a Morgan Stanley report:
"The equity rally this calendar year has been one of the more unusual we have seen. What started in January as a fast embrace of aggressive market pricing of monetary easing (the RBA at one point was priced for three cuts this year) and high hopes for cyclical recovery in earnings trends has devolved into a rather precipitous fall in market earnings, whilst the price paid for them has continued to expand.
"Forward earnings down 2.7% vs multiple up1.7 P/E pts is the CYTD flyer catchy but kind of uncomfortable particularly when compared to the US where multiple expansion has at least been accompanied by +15% growth in FY25e earnings.
"The rally has taken the market to now be ~2% above our 8,100 price target but to be clear the earnings we assumed that would get us to these levels are some 13% above current expectations and FY25e EPSg for the market now sits close to zero.
"Should this be cause for concern?
"The short answer is yes, as with valuations where they are there is little buffer to absorb endogenous disappointment or any exogenous shock. Indeed, for meaningful upside from here, earnings trends need to start to improve."
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