My yearly global equity outlook is slightly negative, mainly due to record valuations. MSCI All Country World, the broadest global stock index, is currently valued at P/E of 32 and EV/EBITDA of 17. These are truly unprecedented values. I believe that global equity valuations should gradually normalize in the coming period and approach long-term averages. The contribution of the change in valuations to the total equity returns should therefore be negative in the following period.
On the other hand, however, it is also true that record valuations are not in themselves a reason for a major stock market correction of tens of percent. This always requires a negative catalyst. However, I could find a number of them, such as significantly increased inflation, unsustainable government debt, a rapid increase in bond yields to maturity from current historical lows or new and more insidious coronavirus mutations.
Overall, at the one-year horizon, I expect the performance of global equity indices to be around zero, with the change in valuations contributing negatively, while growth in sales and corporate earnings significantly positive. These two factors should therefore offset each other.
Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.