Societe Generale: “Company Valuations No Longer Reflect Risks”

Soc gen lack of choice

Nothing that global equity markets have rebounded 7% from the year’s low point on February 4, a new investment letter from Societe Generale says equity markets could be overvalued and “company valuations no longer reflect the risks.”

“Beyond low interest rates, we struggle (as ever) to understand the bullish mood”

Looking at the various market forces, the research note sounds a voice of concern.  “Beyond low interest rates, we struggle (as ever) to understand the bullish mood,” the note says, looking at the world from a statistical point of view. “Most economic data is soft at best, corporate profit expectations continue to decline and of course we have conflict between Russia and Ukraine. Perhaps we’d better understand rising asset prices in the face of rising risks if valuations were more accommodating, but as we pointed out last week, on most measures equity valuations are elevated.”

“Valuations are increasingly compressed… within the market there is less valuation choice”

Last week global equity markets rose by 0.3% while regional performance was mixed.  Japan saw a a 2.9% gain in the Nikkei 225 while the German Dax fell 3.5%, which pushed the index into negative territory for the year. In the US the S&P 500 added 1.0% and the MSCI Europe index lost 1.5% along with the Dax.

The Societe Generale research note points to a very specific concern related to valuation. “Another concern is that company valuations are increasingly compressed, i.e. within the market there is less valuation choice,” the letter noted. “This is reflected in the lack of names passing our Popular Investment Screens, but also in the low spread of valuations cross-sectionally (see chart below). This is of course not just an equity problem as valuation compression is visible in the sovereign and corporate bonds markets as well.”

Soc gen EPS 4 markets

The report’s many graphics show that regional earnings per share momentum seems to be declining in key regions across Europe and the US.

Value dispersion risk

A further sign of concern, the report noted that investors could leave themselves open to risk due to value dispersion.  “Valuation dispersion is notoriously difficult to use as a systematic market timing or style rotation tool, but that does not negate its investment significance,” the report noted, then concluded. “If valuations are no longer reflecting underlying risk (which are always there), investors leave themselves open to valuation de-ratings when those risks re-emerge, as they invariably always do.”

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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