After a rather rainy month of August, sunshine made a comeback in September, at least in global stock markets. The Eurostoxx Index rallied by 5%, with all sub-indices posting gains, with the exception of the defensive real estate and utilities sectors. Particularly cyclical stocks were sought after; evidently, the "reflation" train is picking up steam again.
The ATX index rose by nearly 3% month-on-month and trades at the highest level in nine years. Since the beginning of the year a staggering gain of 28% (or 733 points) was recorded. In the process the Austrian benchmark index outstripped the performance of most international indexes by a wide margin. Particularly bank stocks and OMV pulled the index up. The rallies in Erste Group, RBI and OMV alone contributed around 500 index points. Just as the S&P 500 Index and the DAX are streaking to new highs, we once again hear doubts being voiced as to whether any of this can still be justified - cue, bubble formation.
The main issue under discussion is the very high valuation of stocks and such arguments are partly warranted – but only partly. In most stock markets price/earnings ratios are significantly above their historical averages. However, if one considers equity risk premiums, this is to say, the spread between the dividend yields of stocks and the yields on fixed income instruments (such as e.g. 10-year government bonds), no significant deviations from long term averages are discernible.
Evidence arguing in favor of the notion that the uptrend is bound to continue consists of the economic upswing underway in most countries and the corporate earnings growth (partly) associated with it. Analysts are currently more likely to have to revise their earnings estimates upward rather than downward, which hasn't happened all too often in the past decade. Leading economic indicators such as the ISM continue to point up as well.
So far, so good. Valuations are lofty, but are justified all the same, so everything is on an even keel. Next year, rising bond yields could possibly lead to the uptrend in stocks leveling out. At the moment we consider budding fears over interest rates to be premature.
A crash is (hopefully) still far away. In our opinion neither high valuations, nor declining earnings growth, nor central bank rate hikes currently pose a threat; solely geopolitical shocks could conceivably derail the markets. And even those would have to be severe, as the markets have built up quite a bit of tolerance to geopolitical news flow by now.
Christoph Schultes, MBA, CIIA
Erste Group Bank AG
4 October 2017
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.