08 Nov Market Commentary – November 2019
Key Global Trends – Equities still pushing higher
Major trends across the four major markets we track above remained unchanged last month, with global equities, gold and the $US still pointing up, and global bond yields still pointing down.
Hopes of a US-China trade deal, a good US earnings reporting season, and tentative signs of stabilisation in global manufacturing indicators supported global equities in October, which made new highs on a month-end basis.
Despite the risk-on sentiment, gold prices also rose, perhaps supported by weakness in the $US – the world’s other non-bond safe haven. Global bond yields also rose only modestly last month, supported by continued low inflation and retention of a clear easing bias by most major central banks. The US Federal Reserve cut interest rates for the third time this year, though hinted at a reluctance to cut further if global sentiment continued to improve. The market, however, continues to expect further Fed easing.
If current risk-on sentiment continues, it would not surprise to see global bond yields push higher in the coming months, and both gold and the $US weaken.
Global Equities – Fundamentals Update
As seen in the chart pack below, the uptrend in global equities so far this year has been led by PE valuations rather than earnings, with the latter in turn supported by the decline in bond yields.
As at end-October, the global forward PE ratio edged up to 15.3, from 15.1, compared with a 10-year average of 13.9. Global bond yields edged up to 1.34% from 1.30%, which is still below their 10-year average of 1.94%. As a result, the global equity-to bond yield differential eased down to 5.2% from 5.3%, to remain only modestly below its 10-year average of 5.4%.
Over recent years, the highest month-end PE ratio reached by global equities has been around 16 to 16.5, or around 6% above current levels.
After solid gains from early 2016 to late 2018, global forward earnings peaked in November last year and declined by 4% by end-March 2019, reflecting sharp declines for earnings expectations in 2019 and 2020. That said, there are tentative signs that the downgrades to global earnings expectations for 2020 and 2021 are flattening out, which has so far resulted in a modest lift in forward earnings by around 2% since end-March. If current earnings expectations hold, forward earnings would rise by 9.6% over the coming 12 months.
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