A meeting of the European Central Bank took place last week. The tone was strongly dovish, which in practice means that the ECB will keep interest rates at zero for a very long time until inflation reaches in a sustainable way, newly symmetric, 2% inflation target. It is also highly probable that the quantitative easing program will definitely not end in the foreseeable future.
We did not see any major movements in the financial markets last week. The broadest global stock index MSCI All Country World recorded a gain of 1.1%. The main US stock index S&P 500 recorded a gain of 2.0%. On the other hand, the Central European stock index CECEEUR declined by 1.0%.
Overall, global equity markets as a whole remain overvalued as my global valuation Z-Score reaches 2.4, which is still close to the all-time high. The average global equity valuation is thus currently around 2.4 standard deviations above the historical average, which is truly unprecedented and above the level from the market peak in 2000. Therefore, I believe that equity returns will be rather below average in the next few years. The average annual equity returns, including dividends, over the next five years on the basis of the broadest global stock index MSCI All Country World are unlikely to exceed 5%.
Bonds traded without major movements last week. The broadest global bond index, Bloomberg Barclays Global Aggregate Bond, recorded a slight gain of 0.1%, while the average global bond yield to maturity fell by 0.04 percentage point to 1.01%. However, in real inflation-adjusted terms, the average global bond yield to maturity remains deeply negative, currently at -3.1%. Negative real inflation-adjusted bond yields to maturity are referred to as the financial repression. The performance of corporate bond indices was also around zero.
As for my outlook on bonds, they are just as expensive as equities at the moment, and even more expensive than equities on the relative basis. Therefore, I believe that bond returns will be below average in the next few years compared to the historical trends.
Commodities recorded small gains during the last week. The global S&P GSCI commodity index strengthened by 0.8%. The price of the barrel of the North Sea Brent rose by 0.7% to $ 74. Gold weakened by 0.7% to $ 1802 per troy ounce.
US dollar strengthened slightly last week. DXY dollar index, which measures the dollar's performance against a basket of other major currencies, strengthened by 0.2%. Against euro, dollar strengthened by 0.3% to 1.177 USD/EUR. Koruna weakened last week. Against dollar, koruna weakened by 0.7% to the level of 21.80 CZK/USD and against euro, koruna weakened by 0.5% to 25.65 CZK/EUR.
Investment Strategist at Conseq Investment Management, a.s.