What global asset valuations tell us about investing in Q1 2024

Early in 2024, various measures of global asset valuations show there are real opportunities for investors across many assets and regions around the globe. However, there are also reasons for caution given the numerous expensive assets as well. The bar graph offers a convenient snapshot of which global assets currently appear expensive and which cheap, compared to their long-term equilibrium or fair value. The gold dots illustrate the fair value for each asset type over the long term (1900-2022), while the bars depict the real return that could be expected from the asset over the next three to five years, based on its current valuation.

Cheapest equity markets

From the graph, it’s easy to see that among global equity markets (right half of graph) Hong Kong equities stand out for their cheapness, offering far better real return prospects currently than their long-term equilibrium/fair value – this reflects negative sentiment on the back of disappointing Chinese growth. Other cheap developed markets include Singapore, Italy and Spain, and among emerging markets (shown by blue bars in the graph) Brazil, South Korea and South Africa also appear cheap.

Most expensive equity markets

On the other end of the spectrum, Indian equities appear to be the most expensive on a valuation basis currently, with prospective real returns falling far short of their long-term equilibrium. Investors optimistic about growth (seen at 7.0% in 2024) and stability under Prime Minister Modi have bid up the market. Other expensive equity markets include the US (after the strong AI-related stock gains in 2023) and Japan to a lesser extent.

Bonds broadly expensive

The left half of the graph highlights how highly rated developed market bonds (in light green) are generally expensive following the strong November-December rally, with current prospective real returns falling below their long-term equilibriums. Japan remains the only major market with negative real bond (and cash) yields, a result of the Bank of Japan maintaining its very easy monetary policy. Meanwhile, emerging bond markets like Mexico, Brazil and South Africa (shown in dark green) are offering very attractive prospective real yields.

Positioning guided by valuations  

Given the wide dispersion in asset valuations and prospective real returns, there are investment opportunities to be taken. However, investors would be wise to be selective in their portfolio choices in 2024, just as we are at M&G Investments. As valuation-based investors, our portfolios like the M&G Global Balanced and Global Inflation Plus Funds are tilted away from US equities, while favouring certain European equity markets as well as China. In our view, Chinese equities are offering a particularly attractive discount that should compensate investors for the risk involved, and we are optimistic that the economy will experience an eventual turnaround.