Skip to content
A great historic (1881-2020) chart showing median cyclically adjusted P/E multiples (CAPE) during various interest rate regimes. There is a balance – low interest rates mean future cash flows are worth more discounted but are associated with weaker growth. The chart suggests a goldilocks principle – highest P/Es associated with real interest rates in the middle of the range.
The UK stock market is very cheap relative to the world no matter how you cut it.
The outperformance of the US stock market has been well documented. This table, however, suggests something different below the surface. Looking at the top 50 stocks in the MSCI ACWI Index over the last decade – on average 75% of these have been outside the US.
This series is one of the better when it comes to understanding what has gone wrong for value investors. The first looks into whether value is actually cheap. “The evidence brings us full circle to Arnott’s observation that the problem with the Value Factor has not been the absolute performance of Value stocks . The problem has been shorting the Glamour stocks “. The second , propose something very intriguing – “that looking through the lens of optionality reveals that the source of excess returns to factors are not a function of the securities themselves, but rather the rules of portfolio construction and the embedded optionality these rules create “ The third article is yet to be published.
A long term chart of portfolio turnover for US based mutual funds. 1975 saw a big rise as trading commissions were de-regulated and bid-ask spreads were moved from 1/8th basis. The next 30 years has seen a precipitous decline. NB. Turnover is defined as the lower of the total amount of securities purchased/sold divided by total net asset value of the fund. Source.
Low rates have spawned a growing army of zombie companies. This chart from DB shows companies where debt service payments exceed profits. These now make up nearly 20% of firms.
Interesting chart showing the percent of time (y-axis) various asset classes outperform inflation over a given time horizon (x-axis). Equities come out on top. Gold and Commodities, the usual hedges, actually don’t perform that well.
Interesting chart from MS that suggests that in the post-war period recoveries have tended to be V-shaped. The latest fund manager survey from Bank of America shows just 10% of respondents expect this .
Interesting chart showing the relative valuation of stocks with a high environmental, social and governance (ESG) score. Although the chart is to mid-2019 this trend is likely to continue after the Covid19 related market gyrations are over.
Interesting chart that suggests that the underperformance of value investing since 2006 is down to valuation. The reason is that the valuation metric to look at is free cash flow yield to enterprise yield and not P/B or P/E. On this metric the Russel Value Index has been expensive since 2007. This is partly because in 1985 68% of the market value of the S&P 500 was tangible assets, today that number is 16%.
Interesting chart from BofA. It shows the relative performance of the “reopening” portfolio vs. the lockdown portfolio. You can imagine what stocks make up each portfolio. Interesting to see “reopening” struggling despite some of the green-shoots here .
Interesting chart from SG via Einhorn’s Q1 Letter . It shows the median forward P/E ratio of MSCI World Stocks split into two groups. The first (dotted line) are stocks with the highest positive correlation to bonds. These trade on 24x. The second (green line) are stocks with the highest negative correlation to bonds. These trade at 10x.
Two great charts from KKR Macro Insight . They plot the markets trailing P/E ratio against CPI inflation (right hand side) and the 10-year real treasury yield (left hand side). The data is from 1948 to today and sourced from BofAML As real-rates go negative or inflation falls multiples tend to be lower. KKR analysis suggests there isn’t some funny data skewing results here. What about today? at the current real 10-year yield of -1.5% and inflation rate of 2.3% (likely to fall) the 17.5x P/E ratio for the market (since increased) stands out as too high. These types of equity strategy charts are good to hang on to.
Sometimes it is important to take a step back and look at the chart of the long term history of markets. This is a great one from JPM of the S&P 500 index annotated for various events going back to 1900.
Long run (1974-2020) chart of sector composition of the S&P 500 index. Energy is just 3% of the S&P down from 26% in 1980s. Financials have also shrunk from 22% to 11%. Interestingly IT is now 25% from 33% at the peak. However, we need to add Communication Services (10% today) – which puts it above peak.
The dividend futures market has been crushed. This chart (from ML) on the left shows the futures curve for S&P 500 dividends compared to 2019. The blue line is how the market looked at the top (21st Jan 2020) and the orange how it looks today. The market is pricing in -42% in dividends by 2021. The right hand side shows the situation in 2008 – the actual reality (dark orange line) was far better.
JPM prime broking suggests considerable de-risking on both sides (longs and shorts) has taken place.
Staggering outperformance in the sell-off of the most liquid stocks.
Interesting chart of sector PMI in Asia. Output fell in all but one sector – Biotech.
Nice chart from IHS Markit showing PMIs against equities YoY change. Suggests equities not yet reflecting weak PMIs. World Index P/E is about 15x and earnings still need to come down.
WordPress Cookie Notice by Real Cookie Banner
