The rally in equities looks set to grind higher

Eley Griffiths Group

These days the challenge in writing an outlook piece for the stockmarket is to try and avoid rehashing the same supportive comments for global equities. I guess a bull case is a bull case even if valuation yardsticks aren’t quite as appealing this quarter as they were in the last.

In the US stockmarket, PE’s, Price/Sales and Price/Book are each on the full side but by no means excessive. The equity risk premium sits at ~ 4.8%, continuing to endorse the case for equities over bonds. Goldman Sachs this week advised that the S&P500 ROE had improved to ~ 15.4% for CY17, the highest since 2014, in line with the post GFC average but shy of the long term peak of 19.9%. Improving energy company earnings the contributor.

The US Q3 earnings period is underway and the occasional ‘peak earnings’ retort has been sighted in commentaries. No escaping the fact that their market is on track for ~ 10% earnings growth this year and consensus assumes about the same for 2018. Recall minimal growth was recorded in 2014, 2015 and 2016. Secure passage of the US tax reform legislation (NB: corporate tax rate to 20%) has variously been given a 65% chance of success in 2018. Restoration of profit growth will presage increased capital investment by US corporates (read: it’s what equity investors will want to see).

I was wondering whether seasonal weakness in the US, September through October, might prevail upon their stockmarket but it appears not to have eventuated. Volatility remains at very low levels.

Locally, if the technical summary in our quarterly hasn’t aroused your interest then the recent Deutsche Bank/ABS chart on super fund allocations might do the trick. Cash and deposits continue to build and this is the store of liquidity that will be pivotal in moving our equity market higher.

Investors should be aware that the annual general meeting season is currently underway and this will be a useful look-in on how corporate Australia is faring. So far nothing to be alarmed about.

I am reminded of Sir John Templeton’s 4 stages of a bull market. Pessimism, sceptism, optimism and euphoria. It would be hard to argue right now that the worlds equity markets are euphoric but they are certainly optimistic. The rally in equities looks set to grind higher.

Authored by Ben Griffiths, Portfolio Manager, Eley Griffiths Group


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