2 minute read
Were any stock markets cheap going into 2021?
Global stocks are expensive, on pretty much every measure, but there are some mitigating factors.
By DUNCAN LAMONT Head: Research and Analytics, Schroders
Where is the value in stock markets today? This is a difficult question to wrestle with. At face value, the bad news is that everywhere looks to be at nosebleed-red levels of expensiveness.
Of the 25 measures in our regular stock market valuation grid (five markets and five measures for each), 16 are more than 20% expensive than their median of the past 15 years, five are between 10% and 20% expensive, and a further three are up to 10% expensive. Only one is in the green and even then, only just.
The US is flashing the most warning signs. It is more expensive than at any point in history outside of the dotcom boom. This is especially important as it has an almost 60% weight in the global stock market (MSCI All Country World Index). What happens to the US market will have a major impact on most investors’ returns.
Prepare for lower returns
There is no way to get around the fact that stock markets are expensive. This doesn’t have to mean they will crash, though. What investors should prepare for, however, is the prospect of low long-term returns. In our recently released 10-year return forecasts, we are only forecasting global equities to return 4.3% a year over the next decade – better than the negligible returns offered by cash and bonds, but well short of long-term and recent historical experience.
There is the caveat that valuations are a long-term tool and have very little predictive power in telling you what might happen over shorter time horizons. With expectations for improving sentiment, a pickup in economic activity and a supportive fiscal and monetary policy environment, a more positive near-term outlook is quite reasonable.
However, given that our 2020 Global Investor Study found that individuals in most countries were hoping for returns of more than 10% over the next five years* (with US individuals most ambitious at 15%), many people are probably in for sore disappointment.
* Note that these return expectations were at their total portfolio level, so also including any cash, bonds and other assets held.
This document may contain ‘forward-looking’ information, such as forecasts or projections. Please note that any such information is not a guarantee of any future performance and there is no assurance that any forecast or projection will be realised. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Past Performance is not a guide to future performance and may not be repeated.
