By Peter Garnry, Head of Equity Strategy, Saxo Bank
May was a rollercoaster ride with first a sharp drop before rebounding taking the MSCI World to a flat performance for the month. As a result, equity valuations are still expensive given the financial conditions backdrop and we remain defensive on equities. Across our theme baskets the best performing were China's little giants, semiconductors, and energy storage.
Global equities measured by the MSCI World Index Total Return USD were flat in May following a 5.5% drop during the month as sentiment shifted last week followed up on Friday with signs that inflationary pressures might have peaked. However, Fed Governor Christopher Waller started this week with comments that he is willing to aggressively fight inflation by going 50 basis points at each meeting until he sees signs of inflation cooling. On top of that, ECB’s Holzmann is saying today that Europe’s record core inflation increases the need for a 50 basis point rate hike in Europe. In addition, the energy and food situation is still getting worse adding to worries that inflation will persist.
Nothing has really changed and our view remains negative on equities due to our expectation of tighter financial conditions, higher interest rates, persistent inflation driven by a worsening energy and food crisis, and China potentially during more lockdowns this year due to low vaccination rate and its zero-Covid policy. Our valuation model on MSCI World is based on seven different valuation metrics measuring different things from revenue, earnings, cash flows and dividends, and it is still showing that global equities are a half standard deviation above the average valuation since 1995. In our view, global equities should be priced around the average given the current conditions and the trajectory for financial conditions.
In terms of our theme basket we saw a large divergence in performance in May with the best performing baskets being China’s little giants, semiconductors, and energy storage driven by direct Chinese policy actions to revive growth and a continued inflow into energy storage critical for the green transformation. The worst performing theme baskets were bubble stocks, cyber security (one of our favourite long-term themes), and crypto & blockchain as the valuation compression continued in highly valued technology stocks.
