Global equity markets are starting to look expensive following their strong run in 2019, according to several multi-asset managers, although attractively valued stocks can still be found in areas that have remained relatively unloved during the recent past. 
In 2019, the MSCI AC World index posted a 26.60 per cent total return in US dollar terms – the best calendar year performance of the past decade – after easing worries about global growth and a pivot towards easing by central banks bolstered investor sentiment.
As the chart below shows, this was another year where returns were led by the US with the S&P 500 making a 30.70 per cent total return in dollars, just beating the 27.13 per cent euro return from European equities.
Performance of indices in 2019
Source: FE Analytics. Returns in local currency
Luca Paolini, chief strategist at Pictet Asset Management, said there appears to be grounds for investors to be optimistic at the start of 2020 as the global economy seems to be stabilising, the US-China trade talks are making progress and the political uncertainty that has blighted the UK is clearing.
However, he added that “risks remain” as, in reality, the US-China trade war and Brexit have yet to be resolved. Pictet’s multi-asset portfolios are therefore neutral on equities, overweight cash and negative on bonds.
“The arguments against shifting to overweight equities are reinforced by our valuation model, which shows global equities are becoming a little expensive,” the strategist explained.
“The price-to-earnings ratio on the MSCI AC World index has climbed to 16x at the end of 2019 from 14x at its start. However, stocks still look more attractive than bonds, which are extremely expensive in both relative and absolute terms.
“Within equities, the UK is by far the cheapest region – a valuation gap which we think might start to close following the decisive election victory by the Conservative party.”
UK stocks to close gap with global peers
Source: Pictet, Refinitiv. Data taken from MSCI UK and MSCI World indices, covering 1 Jan 1991 to 31 Dec 2019
The UK led the global rally that closed 2019 after the Conservatives won a convincing majority in December’s general election. Prime minister Boris Johnson’s pledge to ‘get Brexit done’ offered the market some clarity on the direction of travel, while investors were also buoyed by hopes that the UK follow countries such as Japan, Korea and India in using fiscal stimulus to support growth.
“In our view, the UK market’s outperformance should continue. International investors are under-invested in UK stocks and we expect them to raise their allocation in the coming months as political tensions ease. At the same time, we also believe UK companies could become acquisition targets for overseas firms,” Paolini added.
“UK companies are among the most attractively valued in the world according to our scorecard, with a price to earnings ratio of 14x. Their dividend yield of 5 per cent, meanwhile, is twice that of the MSCI AC World index. Also, the industry breakdown of UK indices means investors can gain greater exposure to sectors we favour at a global level: cyclical value stocks such as banks and quality defensives such as pharmaceuticals.”
The only other equities that Pictet Asset Management finds attractive are emerging market stocks, which are more attractively valued than much of the developed world following a period of underperformance.
David Hambidge, director of multi-asset funds at Premier Miton Investors, also sees equities as being more attractive than bonds but warns that returns for the coming decade are very likely to be lower than those seen in the last one.
This is down to valuations: while of course markets might remain expensive for an extended period of time, he noted that history suggests they will fall to a more reasonable level at some point.
“As far as individual markets are concerned, it is the US that continues to cause us the most concern with share prices on some measures looking more expensive than ever,” Hambidge said.
“US equities have delivered by far and away the best returns of any developed market over the last ten years and although there are many things to like about corporate America, it is our strong belief that the next few years will be far more challenging for its shareholders.”
The multi-manager funds run by Premier Miton Investors considers Japan as looking “particularly cheap” versus the US, owning the likes of Lindsell Train Japanese Equity and CC Japan Income & Growth.
Hambidge added that the UK also looks attractive, especially for income investors. His team owns UK equity income strategies such as Evenlode Income, Fidelity MoneyBuilder Dividend and Franklin UK Equity Income.
Liontrust head of multi-asset John Husselbee is another than is constructive on equities but keeping a close key on valuations.
While he conceded that concerns about a looming recession are understandable, “too many powerful people have too much to lose from economic downturn”. He singled out US president Donald Trump as being prepared to “stop at nothing” in order to maintain the ongoing market rally that he has taken credit for.
“In terms of our portfolios, the asset allocation call is a clear one: maintain an underweight to US equities and buy pretty much any other equity markets, primarily on valuation grounds,” Husselbee finished.
“We continue to favour Asia and emerging markets over the long term but it is fair to say that ongoing market noise has obscured the long-term fundamentals. These markets tend to perform best when the global economy is growing and the oil price and dollar are weak – and recent events in the Middle East will clearly have an impact on the former.”