Equities are still expensive after rollercoaster May Equities are still expensive after rollercoaster May Equities are still expensive after rollercoaster May

Equities are still expensive after rollercoaster May

Equities 8 minutes to read
Peter Garnry

Head of Saxo Strats

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


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992