Although the world economy is currently in the deepest economic recession since World War II and corporate profits are declining by an average of almost 30% year on year, stock markets are doing relatively well thanks to massive monetary stimulus from key central banks, with the broadest global equity index MSCI All Country World in a nice plus of 2.9% since the beginning of the year.
However, we are rather skeptical about expectations for the next five years. Our global equity valuation currently reaches the level of + 32%, which is still significantly higher than the neutral range of -10% to + 10%. In our opinion, the equities are currently overvalued by at least 20%.
The valuation of global stock markets is thus very high, and we expect average annual equity returns, including dividends of only around 4-5%, for the medium term of the next five years. At the same time, we expect valuations to decline by approximately 6% on average each year as part of the mean-reversion process.
We fully reflect this fact in our global equity allocation, in which we decided to underweigh at -25% at the end of September. At the same time, we cannot rule out that we will increase our equity underweight in the coming weeks. Overall, therefore, we currently have a slightly negative view on global equities.
Investment Strategist at Conseq Investment Management, a.s.