Over the past week, financial markets have continued to grow modestly again, both stocks and bonds and commodities. The broadest global stock index MSCI All Country World recorded a gain of 0.4%. US stock index S&P 500 recorded a gain of 0.4% and closed the week on a new all-time at 4247 points. On the other hand, the Central European stock index CECEEUR weakened by 0.6% last week after very strong previous growth.
Overall, global stock markets as a whole remain overvalued as our global valuation Z-Score reaches the level of 2.4, which is still close to the all-time high. The average global equity valuation is thus approximately 2.4 standard deviations above the historical average, which is truly unprecedented. Therefore, I believe that equity returns will be rather below average in the next few years.
The broadest global bond index, Bloomberg Barclays Global Aggregate Bond, recorded a gain of 0.3%, while the average global bond yield to maturity fell by 0.04 percentage point to 1.08%. However, in real inflation-adjusted terms, the average global bond yield to maturity remains deeply negative, currently at -2.8%. The performance of corporate bond indices was also slightly positive over the last week.
As for the outlook for bonds, they are, like equities, currently very expensive, on a relative basis certainly even more expensive than equities. Therefore, I believe that bond returns will be strongly below average in the next few years compared to average historical trends.
Commodities also performed well last week. S&P GSCI global commodity index recorded a gain of 0.7%. The price of a barrel of the North Sea Brent rose 1.1% to $ 73. Gold weakened by 0.7% to $ 1,877 per troy ounce.
Dollar has strengthened over the past week. DXY dollar index, which measures the dollar's performance against a basket of other major currencies, strengthened by 0.5% last week. Against euro, dollar also strengthened by 0.5% to 1.211 USD/EUR. Koruna strengthened last week. Against dollar, koruna strengthened by 0.5% to the level of 20.90 CZK/USD and against euro, koruna strengthened by 0.4% to the level of 25.34 CZK/EUR.
Chart of the week – Euphoria on the private equity market
According to data from the consulting company McKinsey, the private equity (PE) sector is currently literally reminiscent of an euphoria. The worldwide volume of transactions (purchases/sales of companies) has reached half a trillion dollars since the beginning of this year. If this pace continues for the rest of the year, we will get over the level of one trillion dollars for the whole of 2021, which would be a new and clear historical record.
At the same time, private equity funds currently use the most debt capital in history to finance transactions on a relative basis. The average debt ratio – debt / EBITDA – is close to seven times, which is also a new historical record. Private equity funds are thus riding merrily on a wave of unprecedented monetary stimulus from key central banks and zero nominal interest rates.
This development urges me to be careful. From a historical point of view, it has always been the case that the peak of the stock market cycle corresponded to the peak of the activity of private equity funds. I even dare say that the public and private equity and debt markets are "on the steroids" of the unprecedented quantitative easing of key central banks and zero nominal interest rates. This is therefore one of the reasons why our investment outlook at Conseq is rather cautious and why we are relatively significantly underweighted in the asset allocation of our investment portfolios against benchmarks as regards equities.
Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.