Mind the valuations

Chart - 1 min read

After recent rebounds in stocks and bonds, we take a quick look at valuations and how they stack up against history. 

Leading equity indices have recorded a remarkable recovery, especially given the huge uncertainty that still surrounds earnings estimates. It’s unlikely to be a comfortable ride in the coming months as most of the world will be in recession this year. But for longer term investors, history is on your side. This week’s Chart Room shows that valuations across most regions remain below long-term average levels. Buying assets with a healthy margin of safety, one that allows for some earnings volatility, is often a key factor for generating positive returns in the long-term.

But it’s also worth noting how the upheaval over the past six months has been uneven across different asset classes. For example, contrast the relative moves in equities and sovereign debt with corporate credit. The chart shows that current credit spreads across corporate investment grade and high yield bonds remain below the 20th percentile of their historical range. This may be particularly appealing to income-seeking investors looking for options to increase the relative security of their income without giving up too much yield.

Source: Fidelity International, Refinitive DataStream. 08 May 2020.
Note: Historical data since January 2004 (*EM Corporate Bond data since September 2004 and China 10 Year Government Bond data since July 2007). Valuation metrics used for asset classes are as follows: Government bond indices showing redemption yields; ICE BofA Merrill Lynch Corporate, IG Bond, and High Yield indices showing option-adjusted spreads; JPM EMD local currency index showing yield; JPM EMD hard currency index showing spread; MSCI equity indices showing average of forward P/E and price-to-book ratio.