Exposure rates of the Dorval Asset Management Range – 23th April 2019

European business surveys have been stuck on lacklustre levels since the start of the year, while the equity markets have surged dramatically (cf. chart 1), with a particularly forceful rebound for the most cyclical stocks over recent weeks, including the much-maligned banking sector.

Are investors now giving in to unwarranted – or at least premature – optimism? Maybe. Although as we have already noted, China’s hefty weighting in the world economy means that the encouraging indicators coming out of Beijing recently are driving hopes in business quarters. Meanwhile, European figures seem to be stabilising, although admittedly not yet improving, after a long period on the wane. As is often the case, the financial markets react strongly to these small changes, and there is still valid reason to hope for an improvement out to the summer. Lastly, pressure on the European Central Bank is set to remain high, which helps make the euro competitive and enables investors to expect additional stimulus measures.

Strong rebound for European equities,

but economic recovery in euro area taking a long time to emerge

EuroStoxx 300 (RHS) / Euro area composite PMI (LHS)

Continuing on in the same vein, many will often say that aggressive central bank policies tend to trigger a detrimental divergence between economic reality and market trends. Short-term divergences can admittedly emerge – and this has most probably been the case since the start of the year. Yet if we take a step back and compare the world equity index with world economic activity as measured by nominal GDP over the long term, we see no substantial difference at this stage (cf. chart 2). So we cannot hold with this belief that equity markets are currently vastly disconnected from their economic fundamentals.

“Macro” P/E for MSCI World

Ratio between share prices and world GDP

MSCI World/world GDP (both in US$) (0=historical average)


However looking to the shorter term, the expected economic recovery in Asia and Europe will need to take shape and US growth will need to hold up if we are to maintain our current stance promoting the more cyclical investments on the market. April’s European and US PMI stats were clearly disappointing, but demand indicators – including US consumer spending – remain robust, and purchasing power gains continue across most developed markets. So for now, we are giving the world economy the benefit of the doubt.


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