Selloff has left valuations at 'pretty compelling' levels: Aequitas Investment Partners
Global equity market valuations are approaching historically low level
Source: iStock
KEY POINTS
- The "everything bubble" has now deflated to just "quite a few things bubble"
- Earnings might fall in the near-term, pushing global valuations slightly higher
- At historically low PE ratios, ex ante returns seem relatively attractive
The global equity market selloff has left valuations at ‘pretty compelling’ levels, according to Aequitas Investment Partners.
The "everything bubble", has now deflated to just a "quite a few things bubble", with notable corrections across asset classes such as crypto, NFTs, SPACs and Cathy Wood's ARKK Innovation ETF, Aequitas said in a note on Friday.
Even at tempting valuations, the note acknowledged downside risks including:
"Hard stop" for the housing market, notably in the US where mortgage rates have more than doubled from covid-lows
Potential earnings downgrades due to higher interest rates, tight monetary policy conditions and elevated energy prices
The earnings headwinds could put "the forward PE 2-3 points higher, on average, across the globe, but that would still lead to relatively attractive ex ante returns," said Aequitas.
Source: Aequitas Investment Partners
The note pointed to sound earnings from US corporates, including a guidance upgrade from FedEx and home-builders pointing to still strong conditions.
Turning to the ASX, Aequitas observed that "the only sector with firm EPS downgrades has been the IT names, most of which weren’t profitable to begin with.”
Consumer discretionary was also viewed as another sector of weakness that "is seen to be over-earning ... and, in our view, actual downgrades to come as a lower-share-of-wallet bites."
Aequitas said that they were underweight on international equities coming into March and started adding after the Russia-Ukraine war broke out. The fund remains underweight in ASX equities.
If valuations fall further, "we'll increase our exposures".
