Is there anything cheap left?
As we’ve highlighted in the two previous quarterly asset allocation valuation publications, (pretty much) everything is expensive. Abundant liquidity has pushed valuations in many areas of global financial markets up to high, and even extreme, levels.
This upward pressure is evident in a variety of valuation metrics across and within those asset classes:
- median sector PE ratios, for example, are still close to 2020 highs;
- the share of global equity markets with a top quartile PE ratio remains close to YTD highs;
- high proportions of US, UK and Eurozone equities have PE ratios above 20 (relative to those with PE ratios below 10, as shown in figures 9i below and 9viii in the full document).
Other valuation excesses include high house prices (in many parts of the world), negative bond yields, and elevated US household net worth relative to GDP. Despite that, on a relative basis, there are some areas of the market that are attractive: Median PE ratios of stock indices, for example, suggest that US stocks are undervalued relative to the Eurozone.
Likewise, on a sector level, defensive sectors are at all-time low valuations relative to the overall market. The dollar, meanwhile, is expensive on various metrics (which means that the other side of various currency pairs are, therefore, cheap). As such, we’ve highlighted below three key areas of the market in which valuations are particularly extreme or attractive.
- a new commodity super-cycle is likely to be underway (albeit maybe a shortened version);
- various non-dollar currencies appear cheap on a variety of metrics; and
- key defensive sectors of the global equity market are also notably cheap (see "Key points" section in the full document for details).
The full document is available in the PDF below.
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Longview Economics, founded in 2003 by Chris Watling, is an independent research house based in London, providing three distinct yet interrelated groups of research products: Short and medium term market timing; Long term global asset allocation...