Equities Equities Equities

Equities are still expensive after rollercoaster May

Equities 8 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  In today's equity update we look back at May which was a rollercoaster ride with first a sharp drop before rebounding taking the MSCI World to a flat performance for the month. As a result, equity valuations are still expensive given the financial conditions backdrop and we remain defensive on equities. Across our theme baskets the best performing were China's little giants, semiconductors, and energy storage. We also cover Salesforce earnings last night and preview MongoDB earnings later today.


The light is still dim for equities

Global equities measured by the MSCI World Index Total Return USD were flat in May following a 5.5% drop during the month as sentiment shifted last week followed up on Friday with signs that inflationary pressures might have peaked. However, Fed Governor Christopher Waller started this week with comments that he is willing to aggressively fight inflation by going 50 basis points at each meeting until he sees signs of inflation cooling. On top of that, ECB’s Holzmann is saying today that Europe’s record core inflation increases the need for a 50 basis point rate hike in Europe. In addition the energy and food situation is still getting worse adding to worries that inflation will persist.

Nothing has really changed and our view remains negative on equities due to our expectation of tighter financial conditions, higher interest rates, persistent inflation driven by a worsening energy and food crisis, and China potentially during more lockdowns this year due to low vaccination rate and its zero-Covid policy. Our valuation model on MSCI World is based on seven different valuation metrics measuring different things from revenue, earnings, cash flows and dividends, and it is still showing that global equities are a half standard deviation above the average valuation since 1995. In our view, global equities should be priced around the average given the current conditions and the trajectory for financial conditions.

In terms of our theme basket we saw a large divergence in performance in May with the best performing baskets being China’s little giants, semiconductors, and energy storage driven by direct Chinese policy actions to revive growth and a continued inflow into energy storage critical for the green transformation. The worst performing theme baskets were bubble stocks, cyber security (one of our favourite long-term themes), and crypto & blockchain as the valuation compression continued in highly valued technology stocks.

Source: Bloomberg

Salesforce price reaction shows current reward function

Investors were excited last night over Salesforce’s earnings release which developed a small cut to its revenue outlook for the current fiscal year, but also a small increase in its earnings outlook. Shares were higher in extended trading underscoring the significant change in reward function for companies that has taken place over the past six months. Companies are no longer rewarded for breath neck revenue growth at all costs but instead cost discipline, higher ROIC and margin preservation.

As we discuss in today’s podcast, the Salesforce earnings reaction is an interesting lead in to tonight’s earnings from MongoDB. The company has been part of our bubble stocks theme basket for over a year, and with a 12-month forward EV/Sales ratio of 13.1x despite the stock price is down more than 50% from the peak in November last year, the company is vulnerable to disappointment on margin and cash flow generation.

Source: Saxo Group
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.