- The cyclical rebound in global return on equity has further to run in an economic recovery scenario, despite having softened modestly in the past year. Earnings will be a tailwind for stock prices.
- Global equities are fairly valued relative to corporate profitability. Valuations are not an impediment to further stock price gains, and indeed have scope to increase as investor confidence improves.
- Global corporate profitability is extremely high relative to the cost of capital, fully justifying current equity valuations.
- U.S. valuations are not excessive compared with profitability, and are only moderately stretched relative to global peers on an ROE-adjusted basis.
- EM stocks are notably cheap in light of healthy corporate profitability, but investors need to be highly discriminating given divergences across markets.
- Market conditions will likely remain volatile in the near term, but equities should trend higher in the coming year.
- Outside of energy, earnings for most sectors are rising.
- Stay overweight mid-cycle sectors (i.e. technology and industrials), which will benefit from improving economic conditions.
- Financial stocks remain well positioned to outperform as deflation fears abate and bond yields gradually lift.
- Commodities are extremely oversold and due for a bounce. However, we remain cyclically and structurally bearish on resource sectors.
- Avoid bond proxies, which are crowded and vulnerable to rising bond yields.
ROE – Historic Context
Today versus History (Price/Book v ROE)
Current Trailing and Forward Valuations by Country
Country/Region Highlights
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China: Cheap given ROE
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India: High ROE
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Europe: Cheap Absolute Valuations/Pessimism
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Emerging Markets: Cheap Relative Valuations
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US: Relatively Expensive
Sector Allocation recommendations – US Stocks – Pro Growth, Pro IP (Intellectual Property/Innovation)
As always, please feel free to contact me with any questions or concerns.
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For information on Alhambra Investment Partners’ money management services and global portfolio approach, Douglas R. Terry, CFA is reachable at: dterry@4kb.d43.myftpupload.com
This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product.
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