Market news | 27 November, 2018

Equity market analysis and valuations

Alberto Villasán Investment and Markets Director

Equity market valuations are at historically very high levels, which implies that long-term yields for investors will be lower than in the past.

Although it is true that an already expensive asset in historical terms can continue to rise (as occurred in the period between 1998 and 2000), statistics show that the likelihood of this happening is not very high.

In addition, the current environment of Fed rate rises in the US is placing a burden on risk assets, especially those which have a less predictable level of expected yield. The reason is that many global investors are swapping these less predictable investments for other more secure and profitable ones, such as US government bonds or bonds of companies with solid and solvent businesses.

A wide spread in prices between the different sectors and geographical areas is also currently being seen. On one side, we have sectors with very high historic valuations -as is the case of the technology sector- and on the other, sectors which have some of the lowest valuations in their history -such as mining-.

It is precisely in this sort of environment when active management and value managers can contribute a lot to investors, compared with growth-type strategies or even passive investments, as is the case with the majority of ETFs. For this reason, that would be our choice when it comes to choosing a vehicle or investment style. It is equally very important that this selection of vehicles and ‘winning’ managers should be done in a much specialised way, since it is not a question of buying cheap companies -in historical terms- with problems, but rather in buying cheap companies and businesses which are solvent and profitable in the long term. This is particularly important as when we analyse the manager universe, we find a large number of both types.

For that reason, our experts in product selection and analysis ensure a deep and exhaustive analysis is carried out and, therefore, we recommend that our clients contact their usual advisor or banker before investing long-term in equity.