The year 2019 was exceptional for equities. The MSCI World posted a total return of 28%. The S&P 500, the MIB
40 and the SMI increased even more, while the Topix, the FTSE 100, and the MSCI EM underperformed by 9-11 pp. Global 12-month forward earnings estimates increased in the year only slightly (+1.7%), being even negative in the euro area (EA), EM and Japan.
Low bond yields to sustain equity returns
Highlights:
- Global equity markets posted very strong total returns year-to-date (+28%), mainly through PE expansion, in part explained by low yields.
- The relevant trigger was the big central banks’ U-turn towards a dovish stance which, together with decreasing political risks, induced bond yields and credit spreads to plunge, offsetting earnings decline and poor manufacturing momentum.
- While current valuations are above norm (still below previous peaks) and the recent rally is already anticipating some good news, investors’ expectations (Sentix) are still far from exuberant. Yields from earnings and dividend will also remain higher than those from fixed income investments. This, together with macro green shoots and funds flows rotation from bonds into equities, could sustain stock market multiples at high levels and above historical norm.
- In sum, while being lower than in 2019, equity total returns in 2020 will remain attractive vs fixed income’s ones. The returns are expected to be modest (4% to 6%), being rather driven by positive earnings growth and dividend yields and much less by PEs like in 2019.
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