October 20, 2017

Record-high stock prices indexes amid synchronized global growth

Management comment

Dichotomy, paradox, bubble...are among the words which have begun to appear in the financial media over the past few weeks. Around the globe however, economists are welcoming a synchronised recovery, while investors, particularly in the bond markets, are not anticipating an uptick in inflation or a future increase in long-term rates. All 45 economies monitored by the OECD are nevertheless expanding, while the pace of growth among 33 of them is also accelerating. Commodities prices rallied sharply, driven by resurgent growth in China, along with equities, notably in the US. As valuations are becoming strained, investors are using any pretext to justify taking partial profits as we head towards the end of the year.

This was the case last week as the Catalonian crisis was used by some as an excuse for locking-in their profits by selling Spanish assets. Others sold-off Italian bank stocks ahead of new banking regulations regarding non-performing loans, while some investors sold US banks amid fears of heavier loans provisions in the US, or else reduced their positions in Apple in case of disappointing iPhone 8 orders. As equity markets have already posted solid year-to-date returns, it is normal for investors to pay greater attention to valuations and remain on the lookout for discounted opportunities. Cross-referencing the CAC 40, DAX 30, Euro Stoxx 50 and Stoxx Europe 50 indices to identify the least-demanding 2017 PE multiples, the lowest 2017 price-to-book multiples and the highest 2017 yields invariably reveals a common denominator of companies in the same sectors, namely banks, utilities, automobiles, telecoms and oil. Investment ideas should therefore perhaps be sought in these sectors.

Following the bullish Q3 reporting season, the ECB meeting on 26 October may now drive markets to new year-end highs. Mario Draghi will have one last chance this year to surprise us (positively) and trigger the always-welcome year-end rally.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in October 20th, 2017.

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Dichotomy, paradox, bubble...are among the words which have begun to appear in the financial media over the past few weeks. Around the globe however, economists are welcoming a synchronised recovery, while investors, particularly in the bond markets, are not anticipating an uptick in inflation or a future increase in long-term rates. All 45...
2017-10-20