We have recently updated the data inputs to our Valuation Dashboard and the good news is that if inflation is indeed heading back to the 2-3% range then long-term real expected returns are actually looking quite healthy for multi-asset portfolios.

You knew there was a ‘but’ coming and of the big ‘but’ is the inflation outlook is far from certain  and there is a growing chance (especially as of last week) that maybe we are not done with inflation and even if we are many economies are so imbalanced that it is impossible to know what the right ‘real’ interest rates should be.  This may explain the strange shape of the US yield curve and it’s apparent insistence that a recession is around the corner (one that will necessitate lower much lower rates). The bond market is perhaps betting on the fact that  highly indebted Western Economies can’t withstand high real rates and that (some) consumers with high post-COVID cash balances will suddenly run out.    Either way this leaves us needing to do some more work on the apparent dichotomy between the assumptions driving the  bond market and equity markets. This may involve some adjustments to our framework as markets and any forecasting framework is highly dependent on the 10 year yields, which we think will be particularly volatile this year.

On the face of it the asset class level Dashboard is also looking less imbalanced as the difference between the US and, say global small companies or emerging markets has narrowed considerably.

However, given how polarised performance across markets and even within markets (take Mag 7 vs S&P ex IT stocks for instance) we suspect that there is reason for ever more granular analysis and the underlying long-tern assumptions we use. After the US reporting season we will be discussing the plausibility of US tech valuations in particular as current assumed growth rates for a large part of the US market is wildly different from many historical comparison (even compared to the Nifty 50 and DotCom eras.

At the other end of the spectrum sentiment around Chinese stocks just keeps getting worse and the ‘technicals’ were increasingly awful last week. However, it turns out that  the kind of Chinese stocks that Western investors (used to) invest in now look very cheap, and more importantly, are growing much quicker than the Nasdaq!

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Clearly there is a disconnect between sentiment around Chinese tech companies and their underlying performance (even if the wider economy is clearly struggling). We will be road testing this thesis with a variety of global fund managers some of whom have left the market and some of which are returning (typically value investors). To start that journey we spoke to Tassos Stassopoulos last week, who did indeed paint a startling different picture of China after a race t immersive reproach trip. We will be digging deeper into the China story later this week with Trinetra and then we will tray and find some China bears to talk to as well. We have a felling they won’t be difficult to find….,.,.

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