How expensive are equity markets?

CIO MONTHLY | AUGUST 2019

Are we on the cusp of a global recession – or is central bank easing likely to extend the growth cycle for another couple of years, propelling equity returns higher?


In an absolute sense most equity markets have drifted to the expensive side of fair – but in a relative sense, compared with extremely low bond yields, equities appear cheap. This relative valuation supports our overall portfolio stance to prefer equities over bonds. In this month’s update, we examine whether we are on the cusp of a global recession, or if central bank easing is likely to extend the growth cycle for some time to come.

Key points are:

  • It will be important to watch for stabilisation in the global economy in coming months. If global growth stabilises, bond markets could suffer capital loss if central banks don’t cut rates by as much as the markets are pricing and bond yields could retrace moderately higher.
  • A range of positive fundamentals are supportive of the economy. These include ongoing low inflation, tightening labour markets, policy stimulus in China and an incentive from President Trump to ensure US growth and markets are healthy.
  • Although positive fundamentals for the outlook remain intact, we will be watching a range of global indicators ahead to gather confidence that the outlook is improving and earnings can rise to support valuations.
  • While there are always investment concerns on the horizon, we believe taking a measure of risk will be rewarded over the coming year. While returns later in the cycle are likely to be more modest and volatile, we believe risk assets will outperform cash returns over the coming year.