Part 1 : an increase driven by earnings forecasts
Equity markets have risen sharply since the beginning of the year, driven by strong earnings forecasts. The rise in earnings, which has been even stronger than that of share prices, has led to a contraction in P/E multiples (Chart 12). Among other reassuring factors, it is of note that relative to risk-free bonds, the return on equities remains historically high.
However, some measures indicate higher valuation levels than at the peak in 2000, such as the price to sales (Chart 13). Moreover, earnings forecasts are based on high margin assumptions in the US and the pace of upward revisions will be difficult to maintain over the long term. A rise in rates could weigh on the overall level of the markets, but value stocks could then outperform the market.
Part 2 : emerging markets penalized by China
Emerging equities have underperformed year-to-date. This is mainly due to the contraction of Chinese equities (Chart 14). In addition to signs of a slowing economy in China, there have been a number of sector-specific announcements linked to a new emphasis on ‘shared prosperity’. These measures have been interpreted as the CCP taking control of the economy and causing an economic slowdown. The authorities have referred to several areas of work, but the reforms are expected to be implemented only gradually. Moreover, maintaining a good level of growth remains a priority because it is a condition for access to this shared prosperity.
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The opinion expressed above is dated September 2021 and is liable to change. Latest available data as of publication date.
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