The MSCI World Index (ex-Aust) in local currency returned 3.40% over the six months ending 31 December 2014.
Despite a deterioration in the global growth outlook, US equities reached new highs in December as third quarter economic growth was subject to a sharp upward revision. Notwithstanding, company valuations remain stretched despite the positive fundamentals. The end of Quantitative Easing together with the prospect of rising interest rates is likely to limit any sharemarket gains.
European equities are also unattractive. Valuation metrics do not reflect the very poor economic fundamentals. Valuations in China appear cheaper, but downside risks to earnings remain high.
Consensus earnings growth expectations for the top 500 US companies (S&P 500) now approximate 8.8% for CY14 and 12.3% for CY15. Our fair value estimate for the S&P 500 for CY14 is 1751 and 1967 for CY15. As at 31 December, the S&P 500 index is trading at 2059 points.
Over the last 18 months, Australian investors in global equities have benefitted from rising corporate profitability and the falling Australian dollar. Although we expect the Australian dollar will continue to fall over the coming 12 months, global equities no longer offer compelling value. Indeed, should growth in the United States disappoint, then a sharp equity market correction would be likely. Thankfully, this is not our base case expectation but in the absence of value, we recommend investors maintain a modest underweight position.
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