Our global proprietary composite equity valuation evaluates the global stock markets valuation according to MSCI All Country World index with data available from 1995. The lower the valuation level, the more attractive stocks are. Conversely, the higher the valuation level, the less attractive stocks are. At the same time, with our valuation, its value around zero indicates a fair or neutral valuation, when global stock markets are neither too cheap nor too expensive.
During the massive stock sell-off in February and March due to the global coronavirus pandemic, our equity valuation reached a minimum of -24% on March 23. This value indicated that global stock markets were severely undervalued at this time. Therefore, at this point, we have decided to increase the global equity allocation and overweight the global equity component relative to benchmarks. This decision has proved to be the right one, as the global stock index MSCI All Country World recorded a highly above-standard appreciation of 29% from a market low of 23 March.
Currently, the valuation level of global stock markets according to our model is + 3%, which indicates a neutral or fair equity valuation. The currently expected medium-term equity return for the next 2-3 years is therefore around the historically average level of 8-10% per year, including dividends. In making this estimate, we assume that the global dynamics of corporate earnings will return to a growth trajectory close to the long-term average of 9% per year over the next year.
Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.