With 2022 behind us, investors may start to look for what lies beyond the short-term challenges. While we could see a few further obstacles to start 2023, we believe valuations for global developed equities now present an appealing entry point for investors with a medium to long-term investment horizon.
Early 2023 could be a difficult period for developed economies, which are expected to slow while monetary policy remains in restrictive territory with more rate hikes and quantitative tightening.
However, these headwinds appear to be largely priced in. Indeed, the MSCI World 12-month forward P/E has derated significantly. It remains below its 10-year average, while risks over the medium term appear to be skewed to the upside. Volatility in the coming weeks is expected to persist but, given the forward-looking nature of equity markets, the undemanding valuation levels may present an interesting entry point for investors with a mid to long-term investment horizon.
MSCI World Index 12-Month Forward P/E
Improvements to the backdrop may come from different angles as the global economy should bottom out in 2023. Rates in the US may peak in the first half of the year and inflation is moderating, as seen in the past two recent prints in November at 7.7% and December at 7.1%.
The pace of this inflation moderation is important as it will determine not only the level where the US Federal Reserve will stop but also the length of the period over which rates will stay in restrictive territory. Looking at estimates (from the pre-December print), inflation pressures should ease materially over the next two years and leading indicators also tell a consistent story of disinflation. These are encouraging signs for investors with a medium-term investment horizon.
Inflation has been driven by several factors including rising commodity prices, destabilised supply chains and a general shift in demand dynamics post COVID. These factors are now abating. Commodity prices have been moderating with oil prices recently receding too. The gradual move away from the zero-COVID policy in China sparked enthusiasm among market participants. Indeed, despite being part of the emerging market complex, activity in China is pivotal for the growth of developed economies. The reopening should remove some of the obstacles on the supply front. Interestingly, global supply-chain pressures have already eased materially (as can be seen in figure below).
Federal Reserve Bank of New York Global Supply Chain Pressure Index
Focusing on medium-term opportunities, a few key risks must be flagged for investors considering dipping a toe into global equities. These risks include:
While none of these scenarios feature prominently in our base-case scenario, they must be monitored carefully.
With these risks in mind, the relatively fair valuation, rapidly moderating inflation, forthcoming peak rates and economies bottoming out make the case for investment in global equities for investors able to withstand short-term volatility.
The recovery of the global economy and equity markets will likely come in stages and thus investors may desire a diversified exposure. Although from a composition standpoint the MSCI World Index appears to be centred around US stocks, which account for 69% of the index, the revenue split of the index constituents is much more balanced: 47% of revenue is generated within the US, 22% in APAC and 18% in Europe, thus providing a more diversified exposure to global economies.
MSCI World Index Market Cap & Revenue Breakdown
SPDR® MSCI World UCITS ETF (TER: 0.12%) allows investors to gain access to global developed equities in a single trade. The $2 billion fund is available on six exchanges and three currency trading lines (GBP, USD, EUR). Please visit the fund page for full fund details, including all performance data.
Limited Access. For professional investor use only.
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