Value over the long-term
Geopolitics and sentiment shifts in 2018 whiplashed investors and the fourth quarter of the year especially gave new meaning to ‘risk-on’ and ‘risk-off’ trades within the global equities market. To put this into context, when investor sentiment is optimistic about the economy, geopolitics and industry, riskier assets tend to get pricier – ‘risk-on’. Conversely, when uncertainty and negativity hits the market, investors tend to sell riskier assets and buy ‘safer’ ones that are typically less vulnerable to weakening investor confidence – ‘risk-off’. After a violently volatile December 2018 which saw a ‘risk-on, risk-off’ rollercoaster, global equities rebounded and we think the dramatic U-turn shift in mood since then has created some interesting value-added opportunities within global equites.
On the same note, this shift also serves as a reminder that equities ultimately are proven to be long-term drivers of returns within investor portfolios. In fact, since the launch of the MSCI World Index in 1986, Canadian investors would have achieved an average 5-year annualised return of 7.9% -- equivalent to a total return of 46%. Looking at all possible 5-year holding periods (shifting month by month), negative five-year returns were very much in the minority. Similarly, on a ten-year view, the average annualised return was at 6.9%, with only a 13% chance of seeing a negative return over a ten-year holding period. (Figures from Morningstar.) This might seem like a simplistic view of the market and takes no account of adding or withdrawing money to one’s investment pot, for example, but it does profoundly highlight the compound return power of holding equities over the long-term.
Following a very challenging year for equity markets, 2019 started with more attractive valuations across the major markets. We believe these value stocks provide plenty of opportunities since the price paid for them historically has proved to be a significant consequence of the performance of an equity market in the ensuing years. As a result, when valuations are lower – as they are now – future returns tend to be higher because there is less of a de-rating risk. With this in mind, we have grouped average 10-year returns (since 1996) based on the starting valuation of the MSCI World Index (see below). This illustrates why we now believe it is an opportune time for equity investors with a diligent focus on the macro environment, company fundamentals and valuations; and the MSCI World Index’s current P/E of 18x provides an attractive entry point.
Source: Bloomberg & Morningstar Direct, as at 28/02/19. Averages from 1996 due to availability of P/E data.
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.
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