The most confounding thing about financial markets in 2020 was that, in totality, the mood of the global equities market seemed completely different than the mood of everything else happening to humanity – i.e., millions of lives lost worldwide, ongoing concerns for health and employment, political instability, racial injustice, and the list goes on....
The MSCI World Index in the calendar year delivered a positive return of almost 16% (trading in a 46% range after a year-to-date low of -30% at the end of March) while the annual earnings of companies within the index are expected to have fallen by 7%. This represents a price-earnings multiple expansion of around 25%.
During 2020, the price appreciation of public equities reflected a high level of optimism about the ability of the global economy to recover from the pandemic and come out stronger than before. In 2021 we believe that the listed price of publicly traded companies will more closely tie to the underlying near-term earnings trajectory and financial strength of those companies.
While valuation is an important theme when we select stocks, we find attractive stocks at both ends of the price-to-book valuation spectrum. There are cheap stocks we like, and there are cheap stocks we don’t like; expensive stocks we like, and expensive stocks we don’t like. Among stocks that look expensive as measured by price-to-book ratio, we see a subset as attractive once we conduct a nuanced analysis of where they derive their value. For example, in developed markets tech hardware and semiconductors have average or slightly above average value scores according to our proprietary value measures, despite being extremely expensive on price-to-book alone. Figures 1 and 2 show that we expect high returns to be found among both cheap and expensive stocks.