Home News The performance of global equity markets this year may not be nearly as bright as in 2023. What are the main reasons?

The performance of global equity markets this year may not be nearly as bright as in 2023. What are the main reasons?

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The performance of global equity markets this year may not be nearly as bright as in 2023. What are the main reasons?

Buffett valuation indicator of global stock markets is now at 115 percent. This value is well above the long-term median level of 87 percent, and is even quite significantly above the other key long-term median plus one standard deviation level of 105 percent. Global equity markets as a whole therefore appear to be quite expensive right now.

Of course, it is also true that stock valuations are by no means a perfect indicator that could reliably predict stock performance in the short term of one year. At the same time, however, they also provide an invaluable indication of expected stock performance over a longer time horizon, for example seven or more years.

Outside of strongly elevated equity valuations, I see other negative factors that could make the performance of global equity markets as a whole not nearly as bright in 2024 as in 2023. First, at just 1.7 percent, the global equity risk premium is at an all-time low level for at least 17 years, which indicates a somewhat unfavorable return-risk profile of stocks compared to bonds and cash.

Secondly, the growth rate of the world economy is still below average in a long-term historical comparison, although the dynamics have improved slightly in recent months.

Third, the Bloomberg analyst consensus expects strongly below-average growth in corporate profits (EPS – earnings per share) over the next 12 months at the level of six percent, based on the broadest global stock index MSCI All Country World.

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Fourth, analysts continue to expect key central banks to continue with quantitative tightening, which will result in a further decrease in liquidity in global financial markets.

And finally, fifthly, relatively strong persistent inflation across the world economy, especially in the US, could make it impossible for the Fed, contrary to the current consensus, to start reducing the base interest rate already this year from the current strongly restrictive level of 5.50 percent.

All in all, therefore, investors should definitely remain very selective in their global equity allocation and invest primarily in those regional markets that promise solid earnings growth for companies, while also being meaningfully valued.

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