Value Perspective Quarterly Letter – Q4 2021 - Global

Our quarterly note covering the Global markets

09/02/2022

The Value Perspective team

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The performance of US equity market in recent years has been outstanding. The top 10 stocks in the MSCI World Index all hail from the US. The top 8 are all tech, or tech related companies (such as Alphabet or Meta). The US now accounts for 70% of the MSCI World. The next largest country is Japan, with a heady 6.2% weight. The UK comes in third at 4%.  Back in 1990, the US weight in the index was half what it is today, and it’s never been higher.

Evidence of irrational exuberance in the financial markets is fairly easy to see today. More than 15 million Americans downloaded trading apps during the pandemic, and surveys show many of them are young, first-time buyers. US investors poured more than $1 trillion into equities worldwide in 2021; three times the previous record and more than the prior 20 years combined. Moreover, net margin debt (borrowing to buy stocks) is at a all-time high since records began 30 year ago. So there are plenty of narratives to chose from for those who prefer stories to numbers.

For those that prefer numbers, the US market is as expensive as it has ever been on a variety of valuation metrics. Among the most important is cyclically-adjusted PE (CAPE). The US trades on a CAPE in excess or 40x. There is no doubt this is nose-bleed territory: data from the last 120 years shows that investors have never gone to make money over the subsequent decade when asked to pay such a lofty valuation. Exceptionally high valuations can only point to exceptionally low returns over the longer-term. These really are extraordinary times.

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If this all sounds rather doom and gloom , there is silver lining, and that comes in the form of valuation dispersions. This is the gap in fundamental valuation between the most highly rated shares and least highly rated, and it remains at extreme levels:

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On a global basis, the gap is more extreme than at the dotcom peak in 2000. And equity returns after the dotcom boom turned to bust showed the importance of having value exposure: Three years after the bubble burst MSCI World was down 45%, but Value was up 25%.

Moreover, it is critical to highlight that any market valuation is a simple average of the valuations of the individual stocks within it. Even in the US we can find some genuinely attractive stocks for global portfolios, including those new purchases written about in this report, but given the aggregate market valuation they tend to be few and far between.

Ultimately, valuation dispersions mean that returns from the most undervalued parts of the market can be stellar over the coming years, even if overall market returns prove to be paltry. If the valuation gaps that we see today are to return to something more like normal in the context of long-term history, this value recovery has a long way to go.

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The Value Perspective team

Important Information:

The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German, Tom Biddle and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.

They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.

This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.