What will be the investment dynamic for the next months? We have just witnessed is an incredible amount of stimuli coming from central banks around the world and particularly China, but those measures come at a time when the equity market is printing new highs in the US. What should a prudent investor do? Keep accumulating equities at high valuations? Rotate into Non US equities to take advantage of deep discounts vs American large caps? In the chart below, we can see the S&P equity risk premium vs the 5 year real rate, which tells us, US equities are expensive in absolute terms and in relative terms to bonds. And they’re even more expensive relative to EM equities or European equities. Risk assets are well positioned to enjoy the tailwinds of dovish monetary policies and fiscal programs, but at what point do valuations force a rebalancing?
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