Kestrel Investment Partners: Global Equity Valuations Most Attractive Since 2016
New analysis by mulit-asset investment manager Kestrel Investment Partners says that world equity valuations are very attractive and likely will add support to share prices in Q4 2019. The firm says that standard measures comparing equity prices to earnings, book value, and cash flow, as well as those comparing earnings and dividend yields to bond yields, show global shares trading at substantial discounts to their average valuations in this cycle. Kestrel says that valuations are at their most attractive since 2016 and the number of undervalued markets is the highest since then.
John Ricciardi, Chief Executive of Kestrel Investment Partners, comments: “Contrary to recession fears, and the jump in the current ‘recession’ news stories, we see a global cycle rebound with new accelerations in production and prices during Q4 2019. The global cycle will turn up next quarter with producer prices, production, and exports reaccelerating, which likely will be supportive of share prices.”
He adds: “Equities have very attractive valuations, neutral price patterns, and currently a poor fundamental outlook that will be fast improving. Bonds have neutral valuations, very strong price patterns, and sound fundamentals that will be less so later this year. There will be a Q4 2019 recovery in the global cycle, reflecting current very low real yields. The yield curve inversion in the U.S. stems from rate differentials abroad, with USA short rates as set by the Fed currently too high but likely to be corrected this year.”
Kestrel says that the tensions in Asia among North Korea, China, and the USA, and between Japan and South Korea, have not translated into global supply interruptions that would generate high consumer inflation, nor have political and market pressures on Iran and Venezuela kept oil prices from moving down compared to last year. Kestrel has adjusted its Kestrel Global Portfolio to concentrate on the sectors favoured by macro-economic projections such as the worldwide shift this year to financial conditions that are supportive of economic activity, exports, and producer prices giving a boost to share prices.
The equity weighting of the KGP has been raised from 40% to 80% over the past quarter as positions have been added in procyclical equities and its weighting towards 10-year bonds (U.S. and U.K.) has been reduced. This reflects the upswing in the global cycle forecast in KIP’s models.
The KGP is overweight in emerging market and Far East (excluding Japanese shares) on expectations of improvements in global trade next quarter, as well as overweight in Japanese (e.g. Sony and Toyota) and UK equities (e.g. HSBC and Unilever) where share valuations are particularly attractive. Sector exposures are overweight energy, materials, and industrials, reflecting KIP’s anticipation of a global upturn in economic output and prices during Q4 2019.
The chart below from Kestrel shows in the dark line, on the left scale, the world equity index in USD still below its high from nearly two years ago, and in the light line, on the right scale, the world equity price/earnings ratio just slightly above its five year low from last year, and well under its average over the period. Very attractive share valuations reflect investor concerns about political and trade tensions, as well as negative prospects for economic growth, producer prices, and corporate earnings. A positive global cycle shift over the coming months likely will lift valuations for shares, according to the firm.