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SocGen: "Global Stocks Are Trading At 21.5x P/E: What Equities Need Now Is Higher Revenue Growth"

As we begin the second half of the year, which follows one of the best 6-month periods for global stocks in history, largely courtesy of a record ongoing liquidity injection by central banks (which however, is rapidly slowing down), here is SocGen's x-asset strateigst, Andrew Lapthorne, laying out where we stand, noting that the MSCI World positive run continues - at 21.5x P/E, the same level where it was in 2004 from where it continued on a 70% run -even as Europe has its worst month since Brexit, and summarizes that what global stocks need to continue their rally is not high bond yields, but higher revenue growth.

Global developed equity markets managed by a whisker to deliver another positive month in June with MSCI World rising 0.2% in US dollar terms. This enabled the index to maintain is longest monthly positive run - eight positive months in a row - since the 2003/04 recovery when it rose for eleven straight months. As was the case back in 2003/04, this latest streak has been entirely backed by a run up in reported profits, i.e. 100% of the price return over this period was courtesy of higher reported EPS, with valuation changes contributing very little, i.e., the PE multiple, high that is it still is, has stuck at 21.5x over the entire eight months.

 

21.5x PE is also where MSCI traded back in March 2004, yet despite this high multiple MSCI World went on to deliver a further 70%+ return over the next 40 months. Could we see the same again? Well, profit margins are not as depressed today as they were in 2004 (so potential for margin expansion is more muted) but more importantly sales growth is still in short supply. Globally, sales growth ran at 13% per annum between 2004 and 2007. Switch to the present and we see that even with the pick-up in commodity prices over the last 12 months, sales growth is still struggling to get to 4% per annum, while ex Oil & Gas, global revenues are where they stood three years ago.

 

This latest positive run was also maintained despite the most marginal of gains. In currency neutral terms, the index actually edged down, with exactly the same amount of stocks in the index rising as falling. Europe also suffered its worst month since the Brexit vote, having been hit by its own bout of ECB/BOE tapering fears. Usually there is an inverse relationship between bonds and equities, but bond price anxiety in equities last month was quite high. Higher revenue growth, not higher bond yields is what equities need to go up from here.