We use the EB factor indicator to assess the relative attractiveness of stocks to bonds. This indicator is defined as the difference between the inverse of the global equity P/E or trailing earnings yield and the average global bond yield to maturity. This indicator therefore indicates the current yield premium of the global stock market over the global bond market. The higher the value of this indicator, the more attractive stocks to bonds on the relative basis. Conversely, the lower the value of this indicator, the less attractive stocks to bonds on the relative basis.
Based on data from 1999, the historical average of this indicator is 2.4%, while the current value is 2.2%. Thus, we can say that equity valuations are approximately neutral relative to bond valuations. Thus, stocks are definitely not overvalued relative to bonds. On the other hand, the average global bond yield to maturity is also at an all-time low of 0.9%. Bonds as a global asset class are therefore currently the most expensive in history. And since the relative valuation relationship between stocks and bonds is roughly neutral, we can also say that stocks are very expensive.
So both key large asset classes are quite expensive at the moment. It also follows that the average expected annual equity and bond returns over the next five years are well below average. Investors will have to come to terms with this fact. In the past period, stocks and bonds recorded above-average performance, which to some extent "ate" the expected future performance.
Investment Strategist at Conseq Investment Management, a.s.