Global equities: Time to buy?

Recorded live at Face to Face Global in Cape Town on 11 October 2022.
Intended for Investment Professionals.

Following the sharp sell-off across global equities so far this year, almost all the world’s equity markets are currently cheap, trading below their average 10-year price/earnings (P/E) valuation measures. However, a global recession is looming for 2023. Is now a good time to buy equities to take advantage of attractive valuations, or is it best to wait to see? 

It’s true that global equities are cheap at face value: for example, the MSCI All Country World Index was trading on a forward P/E multiple of approximately 14X at the end of September compared to its 10-year average of around 17X, and the MSCI Emerging Markets Index was on a 10X P/E versus its 13X 10-year average. Most of the equity markets of the largest developed countries like the US, UK, Europe and Japan are all valued well below their longer-term averages.

Click chart to enlarge

At the same time, it's important to note that the drop in P/E valuations (as shown in the graph) has stemmed predominately from a sharp fall in share prices, rather than a rise in corporate earnings estimates.  In fact, the latter has stayed stubbornly flat even as global economic growth prospects have deteriorated, with the most recent corporate earnings season proving to be largely uneventful. It is only in the past few weeks that cracks have finally begun to appear, in the form of corporate profit warnings.

Global consumer-facing bellwether companies such as Fedex, Nike, Samsung and Next, and semiconductor companies exposed to the consumer market, have all issued profit warnings recently, and management of giants Google and Meta have highlighted the weak economic environment and announced cost-cutting initiatives. 

“P” needs to fall further

So with all the poor macroeconomic and microeconomic data around company earnings, inflation, interest rates and growth confirming investors’ fears and the very bearish sentiment across financial markets, are valuations now low enough and fully discounting all the expected bad news? Should investors jump in and buy equities? In M&G Investments’ view, we are not quite there yet -- although consensus corporate earnings forecasts are being revised downward, they are likely not low enough to provide a decent buffer against a 2023 recession, so we would like to see stock prices fall further across the board as downgrades come through before fully wading into the market at lower P/E levels.

Ultimately, the answer for investors on whether to buy or not depends more on investment horizons and willingness to cope with elevated volatility over the near-term. For long-term investors who can remain patient, this is a good a time as any other to add to liquid risk assets. The good news is that global companies, in general, are in better shape than they were going into the 2008 Global Financial Crisis (in terms of balance sheet strength, for example), and the indiscriminate market sell-off is providing attractive equity opportunities on a selective basis. 

We have learned that, at times like these when sentiment is extensively negative and the market converges toward the same cautious positioning, any positive news can generate a rebound. Such a trigger could include an end to the Russia-Ukraine war and sanctions, a significant drop in inflation, and/or a U-turn from central banks. None of these appear to be a near-term likelihood, however. On the other hand, it is also difficult to see a protracted fall in equity valuations from current levels. For a protracted fall, there would need to be a credit crisis such as the GFC.

For those that do invest, this is not a market environment for “broad strokes” investing – that is, for generalized macro-driven sector, style or country calls. Markets are being influenced by a multitude of factors, and companies are affected in very disparate ways. It is important to look for companies with solid fundamentals that are being sold off amid market selling sprees. Be selective and consider factors such as balance sheet strength, pricing power, and the ability to generate earnings under stressful conditions. 

To understand how we are implementing these views, for example, in M&G Investments’ global multi-asset portfolios we remain neutral in equities overall, and continue to hold higher global cash balances to take advantage of new opportunities that might arise. Within equities, one area that we like is technology, preferring companies exposed to enterprise IT, cloud and data, whereas we are less constructive on consumer-related technology. More deeply cyclical sectors are also starting to reveal selective opportunities, such as chemicals. Last but not least, we prefer companies with exposure to longer-term themes such as renewable energy, suppliers and users of low-carbon technology, and infrastructure. The latter offers inflation-linked and growing dividends which protect against rising inflation, as well as diversification benefits. These are areas where capital expenditure will continue to increase, regardless of the prevailing market conditions.