Rosenberg equities

Perspectives - Global Equities

Key points

  • Economy and markets: Vaccines boost investor sentiment
  • Factors: Signs of recovery in value
  • Earnings: Loss-makers making the greatest gains
  • Valuation: Valuations stretched as markets move ahead of earnings

Economy and markets

Global stocks were sharply higher in the fourth quarter of 2020 as three separate vaccines were found to be effective against the coronavirus and a number of countries swiftly started inoculations. Joe Biden’s win in the US presidential election in November removed a source of political uncertainty and helped pave the way for additional stimulus. On Christmas Eve, the UK and European Union finally announced a trade agreement, which further supported investor sentiment. The generally positive end-of-year mood lifted global equities to record high levels during December, despite growing concerns about the emergence of a new and highly contagious variant of the coronavirus in the UK. Oil prices made strong gains as the vaccine-fuelled optimism underpinned hopes of a revival in demand, while the US dollar – a safe-haven currency – weakened significantly as risk appetite increased. Against this backdrop, traditionally cyclical parts of the market led the way higher, with small companies strongly outpacing their larger peers, energy stocks staging a sharp rebound and the value factor finally showing signs of recovery.


Exhibit 1 shows the performance of various global equity factors throughout 2020. The series are rebased to 100 at the beginning of what we observe as being the 5 distinct phases in last year’s market. This analysis emphasizes the inherent volatility of factors over short time horizons and highlights the significant shifts in investor sentiment during the year. 

Exhibit 1: Global factor performance in different market phases, 2020

Source: Rosenberg Equities. Data as of 31 December. The exhibt shows univariate factor returns based on the MSCI World Index universe and are square root of market cap weighted and net of market returns. The exhibits are for illustrative purposes only and are not based on actual portfolio returns. Past performance is not a guide to future performance.

As noted in previous Perspectives, much of the divergent performance of factors in 2020 was as we might have expected, given the macroeconomic backdrop. More conservative factors, such as low volatility and quality, provided defensiveness during the “Covid crash” seen at the beginning of the year, but failed to keep pace as markets rallied from their March lows. In “recovery” environments such as these, value stocks typically do well and indeed stocks trading at low multiples of their earnings and book values rebounded in May before hopes of a recovery faded in June. These hopes were rekindled by vaccine news in November, bringing a similar result. While encouraging for value investors, the fourth-quarter revival was concentrated in beaten-down, low-quality companies and largely limited to book yield, with earnings-based measures of value continuing to underperform.  While these kinds of stocks often lead the so-called “relief rallies” when investor sentiment improves, history suggests that a more sustained recovery should have broader beneficiaries.


“Earnings matter” is one of the foundations of Rosenberg Equities’ investment philosophy. Earnings are what sustain a business, fund its growth and ultimately justify its existence. No wonder, then, that they exhibit a strong relationship with stock returns in the long term. More than 35 years of experience, however, have taught us that this fundamental connection doesn’t always hold over short periods of time; earnings should, but don’t always, matter. 2020 was a case in point as investors bid up the prices of unprofitable companies, particularly among smaller companies, leaving them with among the strongest gains across the global equity universe (see Exhibit 2 below). Particularly notable was the performance of an index of loss-making technology stocks monitored by Goldman Sachs: having attracted little attention since its inception in 2014, the index soared almost fivefold from a record low in mid-March to its recent record high. In that period, the index comfortably outperformed benchmarks tracking tech stocks that actually make money. For some, this prominence of profitless technology companies has brought back memories of previous ageing growth markets, particularly that of the late 1990s. Back then, many investors came to believe that accounting metrics like earnings failed to capture a new reality of disruption and innovation. Those investors were right for a while, but when the cycle turned the old tenets of fundamental investing forcefully reasserted themselves. We expect the same to happen this time around.

Exhibit 2: 2020 returns by P/E bucket, MSCI World and MSCI World Small Cap indices

Source: AXA IM, Rosenberg Equities, MSCI, Refinitiv. Data as of 31 December 2020. Past performance is not a guide to future returns. It is not possible to invest directly into an index.


With markets and profits going in different directions, it is perhaps unsurprising that major equity indices closed 2020 at the highest ever year-end multiple of their constituents’ trailing twelve month earnings. Indeed, as Exhibit 2 shows, the most expensive stocks in the MSCI World index delivered the greatest gain. Of course, investors look forward, not back, and markets’ bullish fourth-quarter was built at least partly on the belief that coronavirus vaccines would signal a swift return to pre-pandemic levels of profitability in 2021. Investors, like the broader population, are hoping that last year’s lockdown-affected earnings will turn out to be an anomaly.

However, signs of stretched valuations are not so easy to dismiss. When the S&P 500 Index is measured against the inflation-adjusted average of the last ten years of earnings – to reduce the influence of last year’s numbers – we find that the benchmark ended the year at the second-highest valuation in history, topped only by the tech bubble (see exhibit 3). What’s more, with recent equity market gains also outstripping analyst earnings upgrades for next year, several indices are now also trading at, or near, record highs based on projected profits.

Exhibit 3: S&P 500 Index cyclically adjusted price-to-earnings ratio, since 1900

Source: S&P, Data as of 31 December 2020. It is not possible to invest directly in an index. Past performance is not a guide to future performance.

Of course, for active, valuation-oriented investors, the ratio at which the whole index trades is largely irrelevant. What matters is that not all stocks are richly valued. As noted in recent Perspectives, we still find plenty of room for optimism on this front. 2020 extended, and in many ways accelerated, the two-speed market that we have seen for the past several years. The dramatic outperformance of growth over value stocks, the unusual leadership of loss-making companies, and the concentration of returns in certain sectors of the market have all contributed to a sharp increase in the degree of mispricing we see across global equity markets. While these markets, in aggregate, look increasingly expensive, there are still significant pockets of opportunity beneath the surface.

This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. 

It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. 
All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. 

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