Cross eyed

Global equities have had a good summer. The S&P 500 index of US shares has risen 10 per cent in the last three months; European shares even more. Optimism also showed in bond yield shifts, though recent moves underline the depth of ongoing doubts. The world still has serious problems, and near-term reversals are possible, but asset allocators should hold their nerve.

Gains made over the northern-hemisphere summer have come in thin volumes. Europe shows little sign of the strength it needs to haul itself from the mire, and data from China is uninspiring. US numbers are decent enough, but it would foolish to assume it is set firmly on an upward trajectory.

Many equity markets players are looking for fresh infusions of central bank liquidity to make their life easier. Actually, they should kick that habit. Emergency measures are a sign of economic ill health and although extraordinary measure help support prices, it is myopic to depend on such moves.

Investors’ quest for quality has already pushed up the price of some stocks to unattractive levels. Companies classified by MSCI as “consumer staples”, for instance, trade on a multiple in excess of 15, which is above their five-year average. Some emerging market equity indexes are above historic valuation norms. Citi puts the average Mexican share, using 2012 earnings, on a p/e of 18 compared to a global average of 12.7.

Historical comparisons suggest that high-grade sovereign bonds are still expensive. But European stocks, trading on a multiple of only 10 times forward earnings, sit at a 20 per cent discount to US peers. American shares, meanwhile, are valued a couple of points lower than the 25-year norm. And though analysts tend to err towards optimism, Thomson Reuters data currently suggests they reckon S&P 500 companies will increase earnings by 10 percent in the fourth quarter.

Credit, meanwhile, looks relatively cheap. The Markit Itraxx Crossover index, which crunches credit default swap rates on bonds of 40 sub-investment grade European companies, has moved from 500 to 570 basis points since March. Achievable yields of six per cent on good quality commercial property are also attractive.

Cross-asset allocators with an eye to the upside should hold their nerve.