We now have a slightly negative outlook on equities. In mid-March, we decided to realize another portion of stock gains, primarily because i) major global stock indices are currently moving at new historical highs, ii) stock valuations are also at historical highs or at the highest levels since technological bubbles in 2000, and iii) due to our concerns about sharply rising inflation due to still unprecedented monetary and fiscal stimulus in key major economies, in particular the US, the euro area and Japan. At the same time, according to historical statistics, it has always been the case that with higher inflation, equities did not perform very well. We therefore believe that expectations of a very positive future development have already been priced into the current stocks prices and the scope for further significant stock gains is already significantly limited.
On the other hand, we must emphasize that the overall overvaluation of global stock markets is mainly due to the extreme overvaluation of US equities (P/E 32; P/S 3.0; EV/EBITDA 20). We therefore have them significantly underweighted against benchmarks in our global equity allocation. If our expectations are met and US equities lag significantly behind the rest of the world in the coming months, this will have a very positive effect on the relative performance of our portfolios against benchmarks.
On the other hand, we believe that some regions of emerging markets continue to be valued very attractively. These include, in particular, the region of Central and Eastern Europe, which has lagged far behind global stock indices in recent years. Central Europe is currently probably the cheapest region in the world (P/E 18; P/S 1.3; EV/EBITDA 9). The Central European region is therefore significantly overweighted in our global equity allocation relative to benchmarks. We firmly believe that investors will find their way to it again in the coming months.
Another region that we have significantly overweighted in the global equity allocation is emerging Asia, led by China (P/E 25; P/S 1.9; EV/EBITDA 15). This region has performed very well in recent quarters and our investment portfolios have benefited significantly from this development. At the same time, we firmly believe that the outperformance of this region should continue for the rest of this year. Emerging Asia is currently the economic engine of the whole world. According to the latest forecast of the International Monetary Fund, India's GDP should grow by 11% this year and China's GDP by 8%. This, of course, should have a significant positive effect on the dynamics of corporate earnings of local exchange-traded companies and thus on stock performance.
One of the key risks to our slightly pessimistic scenario for global equity markets is the fact that key central banks are still purchasing assets on an unprecedented scale (quantitative easing). From a global perspective, central banks printed $ 9.2 trillion last year, three times the previous record from crisis in 2008. So we cannot rule out that global equity markets will continue to grow from current historical highs, as the correlation between global stock indices and the global money supply has indeed been very strong since the global financial crisis.
Investment Strategist at Conseq Investment Management, a.s.