SocGen sees limited upside in world stocks

MSCI’s gauge of stocks across the globe is currently at its highest levels ever, up about 17% since start of year

With bond yields set to rise and shares already trading at expensive prices, there is little upside left in equity markets, France’s Societe Generale said yesterday in its 2018 outlook.

MSCI’s gauge of stocks across the globe is currently at its highest levels ever, up about 17 per cent since the beginning of the year with exchanges in Europe, the US and Asia, hitting a series of record highs.

“We expect stretched valuations and rising bond yields to limit equity index performances in 2018 and the prospect of a US economic slowdown in 2020 to further cramp returns in 2019,” the French bank wrote in its report.

Socgen’s analysts believe that American markets have already priced in the expected economic boost of the tax cuts the US government is currently trying to implement.

Valuation model

“Our valuation model suggests that upside on the S&P 500 is limited: the US equity market is already pricing in a rebound in growth and inflation,” they wrote. The index is trading at 22.8 times future earnings.

The fact the US Federal Reserve is widely expected to gradually raise interest rates after years of aggressively expanding its balance sheet is also expected to make stocks less attractive in comparison to bonds.

Turning to Europe, the French bank acknowledges the Eurozone’s economic recovery is in full swing but argues that current valuations don’t leave “much meat on the bone” and that the expected rise in the single currency could also weigh, notably on exporters.

Additionally, with the European Central Bank set to progressively unwind its stimulus package, investors are increasingly wary of the amount of debt some companies have accumulated thanks to historically low interest rates.

Telecoms and cable group Altice, whose shares have collapsed close to 55 per cent in the last 30 days due to concerns on its €50 billion pile of debt, is an example of what is likely to come, Societe Generale said.

Analysts at the bank saw pockets of growth in Germany, France and in sectors such as financials, but warned that political risks are still present, notably in Spain with the Catalonia crisis and Italy which faces general elections in 2018.

“We also recommend staying away from the UK as Brexit negotiations are accelerating and several scenarios are possible: only a soft Brexit would be supportive for the FTSE 100,” they added.