The equity bull market that no-one trusts

The equity bull market that no-one trusts
The equity bull market that no-one trusts
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Equities got off to a terrible start into 2016. At the end of February, a short but intense sell-off was triggered by the emergence of concerns over a slump of the global economy in connection with China. However, since mid-February the international indices have been on the rise without any significant breaks. Not even the much-feared Brexit vote managed to dent the upswing. Although share prices were down in the immediate wake of the decision of the UK to leave the EU, they rebounded very swiftly.

Scepticism due to falling earnings

What is the reason for the broad cloud of scepticism that has been hovering over the rising prices? A glance at the current earnings development of the shares contained by the MSCI World index illustrates why investors are astonished by the performance displayed on the market:


The chart shows that earnings have been on a continuous decline for one and a half years. In the past 40 years there have been only five periods during which EPS were falling for longer – and only during a recession as well. This means that for the first time since the 1970s we have a period of falling earnings without a recession! It is part of the basic working knowledge of any investor that earnings drive prices in the long run. And if not current earnings, then at least expected earnings.

Developed markets are expensive

From a fundamental perspective, prices can also rise without rising earnings: when the markets command attractive valuations. In the long run, valuations tend towards their average, i.e. every attractive valuation will tend towards a “normal” valuation.


The valuation table highlights the fact that the developed markets in particular are relatively expensive. This means that currently share prices are not rising to balance any undervaluation.

Low yields fuels hunt for dividends

This begs the question: what, if not earnings or valuations, is driving share prices up? A possible, and likely answer is, the lack of alternatives. Savings book rates are as low as they can go. Bond yields around zero push investors into risky investments. This may also explain why shares with strong dividends have shown a particularly good performance; in the absence of bonds that pay positive yields, conservative equities with an attractive dividend yield are the next-best thing. As long as yields remain low, the hunt for shares with strong dividends may continue even though earnings are falling and equities are expensive from a historic perspective.

That being said, falling earnings and high valuations should still make for a cautious approach on the investor’s part. Buying the market indiscriminately can come with disastrous results. In this environment, a selective approach is more and more important. However, neither the earnings development nor valuations are suitable as timing instrument.


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This document is an advertisement. All data is sourced from ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. unless indicated otherwise. Our languages of communication are German and English. The prospectus for UCITS (including any amendments) is published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and for ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. pursuant to the provisions of the AIFMG in connection with the InvFG 2011 and regarding ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. published in Amtsblatt zur Wiener Zeitung or at the web site The fund prospectus, Information for Investors pursuant to § 21 AIFMG and the key investor document/KID can be viewed in their latest versions at the web site or or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the key investor document/KID is available, and any additional locations where the documents can be obtained can be viewed on the web site or This document serves as additional information for our investors and is based on the knowledge of the staff responsible for preparing it at the time of preparation. Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.