I’ve been making the case for global equities since the 2008/9 financial crisis. Developed world equities have come a long way, more than doubling, since the 2009 lows but does this make them expensive here? Not in my and many other’s opinion (inc GS’s as below). The same recent positive gains cannot be said for many emerging market equity indexes. (Many EM indexes have underperformed over the same period).
There do seem to be good fundamental reasons for this recent equity strength. World wide corporate earnings are at record high levels, long term refinancing rates are at record lows, the positive spread of corporate profits to fixed income is at a high water mark and the ranks of the world wide middle classes are growing like never before.
Against all these positives we have the continued issues of western over indebtedness of state and household which has contributed to equities under performing their growth in earnings. Equities are priced on assumptions of negative growth from the continued debt problems in the western markets. Here below a chart from the GS report..
To me, the important wild cards here are central bank monetization programs and how these actions feed into money flows. Capital has flowed into debt markets for the last thirty years. If this private capital trend is close to her turning point (debt monetization inevitably will drive private capital away from bonds) this will have multi decade capital flow implication. Whereby equities will be the beneficiary.
Whether equities out perform inflation in the coming years is a different question. Nonetheless the question of whether they out perform cash and bonds is a high probability positive bet, in my opinion. And a bet, therefore, many will take at volume in the coming years.
Here the GS Strat report from last week. GS-Case for Equities-March-2012
All the best
Rich
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