Bad news “priced” in battered global equities

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Citigroup report

Global equities are cheap by historical standards and especially compared with other assets after the drubbing in the first half, Citigroup's equity strategists said in a note.
"Despite the plethora of bad news, we resist the obvious temptation to turn wholesale sellers of global equities. We think that much of the bad news looks to be already in the price," Citi strategists said in a note dated July 2 and issued on Friday.
"A growing list of fears kept investors cautious. The most worrying included undercapitalised financials, earnings risks, accelerating inflation and higher rates."
MSCI's all-country world index has lost about 2 percent so far this month after sliding 12 percent in the first half.
Stocks attempted a rally between end-March and mid-May, before inflation worries pummelled investors, who are now caught between embracing a potential economic recovery and seeking shelter from lacklustre activity and soaring inflation.
"It seems equity investors are on their way to pricing in absolute valuations last seen in the 1980s. Relative valuations are consistent with levels we saw in the 1970s," Citigroup said.
It said the current global price to earnings ratio of 14.3 was lower than the averages seen so far this decade and also below the 1990s average.
"The most recent pullback in stock prices has meant price to earnings is now marginally above the 1980s average. Equities are as cheap, relative to fixed income, as they were in the 1970s."
Reuters polls of 50 leading investment firms in the U.S., continental Europe, Japan and Britain showed the average equity holding in a mixed portfolio of assets dropped to 56.9 percent in June from 59.5 percent in May.
“We are overweight emerging markets and Europe ex-UK, which, in our view offer the best combination of relative earnings momentum, valuation attractions and exposure to growth," Citigroup said.
"We remain neutral on the UK and Japan. We are underweight U.S. and Developed Asia Pac," it said.
At a sector level, Citigroup is overweight materials and energy, with a view to playing global growth trade, and is also overweight consumer staples. It is underweight utilities, information technology and financials.