Thought of the day
12.09 - Equities still have upside potential
The MSCI All Country World Index closed at an all-time high on 11 September, taking returns so far this year to 16.8%. Such gains may tempt investors to take profits, especially after a long bull market, and against the backdrop of rumbling geopolitical tensions.
But there are a number of reasons for investors to maintain equity market exposure:
- Investors that sell the market after big one-day falls risk missing out on strong rebounds. On 11 September, the S&P 500 gained 1.1%, its best daily gain since April. Longer-term, an investor who missed out on the top 10 days of gains between 1 January 1992 and 11 September 2017 would have enjoyed just half the return of a buy-and-hold investor.
- It’s not too late for equity gains. Equities typically move higher at this stage of the cycle. Historically, in the 18 months to six months before a recession, global equities have risen 19% on average.
- Valuations should not be an obstacle to further stock gains. Global equities trade at a price-to-earnings ratio (P/E) of 17.8 times versus a 20-year average of 18x. Historically, when valuations for the MSCI All Country World Index have been in the 18–23x range, the index has returned 6% over the subsequent six months, versus an overall average of 5%.
So we believe there could be a significant opportunity cost of exiting equities, or buying expensive hedges. Instead we believe diversification is a better risk management option, and we remain overweight global equities.