Valuation is in the eye of the beholder

JUST because equities have rebounded strongly in the face of poor coincident economic data does not mean it is expensive and should be avoided at this juncture. Global equity markets have been on a tear lately. Their meteoric rise from March lows has prompted many calls for a downward turn in equity markets. Global small, mid and large caps (as represented by the MSCI All Country World indices) are all trading at levels that are much higher than their respective long-term averages.

But equity valuations always appear stretched during periods of crises. Simply look back to the Global Financial Crisis, eurozone crisis, China de-leveraging crisis, or even the current debacle we are in - the 12-month forward price to earnings (P/E) or price to book (P/B) valuation multiples are almost always considered too high. These metrics have never been good indicators during inflection points. One reason is that earnings are often never proactively revised ahead of price movements.

We often base our views of whether something is cheap or expensive relative to historical prices. In absolute terms, global equities are now trading at levels where they were nearly a year ago, despite projected earnings falling close to half from what they were. Stating that equities are expensive and should be avoided would be an easy conclusion.