Z-Score valuation variable is defined as the current value of the selected valuation indicator minus the average, and this difference is then divided by the standard deviation. My global equity valuation Z-Score is defined as the average Z-Score for the four basic valuation indicators – P/E, P/B, P/S and EV/EBITDA.
During the first quarter, the valuation Z-Score reached a new all-time high of 2.6. This meant that the average global equity valuation was 2.6 standard deviations above the long-term historical average since 1995. At the same time, it was a new all-time high, which also surpassed the previous record of 2000.
Due to the very successful earnings season for the first quarter, there was a significant increase in corporate fundamentals such as revenues and earnings. As a result, the denominators of valuation indicators have risen, which has also led to a decline in valuation indicators themselves (equity indices have generally not risen or fallen in recent weeks, but have been rather moving sideways). As a result, my global valuation Z-Score also dropped to 2.3. However, it is still an enormously high value, as the previous record in 2000 was 2.1 and before the start of the global financial crisis in 2007, the Z-Score was only around 0.5.
Therefore, I believe that the current Z-Score of 2.3 still indicates a significant overvaluation of global stock markets. Especially for this reason, within our investment portfolios we have the global equity component underweighted against benchmarks, currently at the level of -50% between neutral and minimum allocation.
That is why, more than ever before, it is necessary to apply an active investment approach at the moment. This means preferring attractively priced regions and avoiding overvalued regions. As part of our global equity allocation, we currently strongly prefer Central Europe and emerging Asia, while strongly underweighting US equities, which we currently consider to be extremely overvalued (S&P 500 Index – P/S 3.1 and EV/EBITDA 18.2).
Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.