Market Strategy - Monthly Equity Strategy: Still Favouring The Cheap And Unloved Markets - 02 OCT 2017


BMI View: D espite the extreme valuation s in the US, and generally expensive markets outside the US, there are still some highly attractive equity indices , particularly in the resource sectors. We expect a basket of MSCI US Energy, MSCI World Commodity Producers, MSCI Poland, MSCI Malaysia, MSCI Russia, Hang Seng China Enterprises Index, UK FTSE, Italian MIB, Topix Banks Index, and HUI Gold Miners Index to significantly outperform, and should even hold up well in the event of a sharp US equity market decline, which is looking increasingly likely over the coming months.

Our global equity market views remain largely unchanged from last month ( see ' Finding Opportunities In Current Overvalued Markets ' , August 23). We continue to see US stocks as facing uniquely poor risk-reward prospects, with any marginal further advance likely to be wiped out over the coming months due to the combination of extreme valuations, weakening technical strength, and very bullish investor sentiment among retail investors. Outside of the US, the outlook for DM stocks generally is superior, but by no means positive, and the recent surge in bullish sentiment combined with stability in the dollar makes us neutral. Finally, regarding EM, we are broadly constructive, thanks to a more positive technical picture and rising commodity prices.

What we find interesting about the present situation is that, despite the extreme levels of valuation in the US, and even generally expensive markets outside the US, there are still some highly attractive equity indices, particularly in the resource sectors. Last month we ran a chart showing the price-to-book and dividend yield of a basket of indices that we currently expect to outperform. This includes MSCI US Energy, MSCI World Commodity Producers, MSCI Poland, MSCI Malaysia, MSCI Russia, Hang Seng China Enterprises Index, UK FTSE, Italian MIB, Topix Banks Index, and finally the HUI Gold Miners Index. As the chart below shows, not only is this basket cheap on a relative basis, it is cheap on an absolute basis too.

Cheap And High-Yielding Is A Strong Combination
Price-To-Book Ratios And Dividend Yields
Equal-weighted basket of MSCI US Energy, MSCI World Commodity Producers, FTSE, MIB, MSCI Poland, MSCI Malaysia, MSCI Russia, Hang Seng China Enterprises Index, Topix Banks, HUI Gold Miners Index. Source: BMI, Bloomberg

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