* All About Values
We explore the reliability and effectiveness of different valuation metrics in predicting future returns across asset
classes.
* Does value work? Yes it does, but not in the short run. One cross-asset challenge we face is defining 'value' for different asset classes, and finding out what really works. In this note, we test for what's effective.
* It does not work for all valuation metrics: More often than not, what one valuation metric claims is 'cheap' does not show up as 'cheap' on another. We compare the average returns from buying during periods when each valuation
metric is 'cheap' and find substantial differences between valuation metrics in each asset class.
* More useful valuation metrics: What's better at explaining future returns?
Price/book and price/sales ratios for equities, REER and spot/PPP for FX, outright spreads and spreads per leverage for credit.
* Surprisingly ineffective valuation metrics: The trailing price/earnings ratio for equities is surprisingly ineffective. Real yields differentials for FX is another.
* Is anything cheap now? GBP, Mexican assets, HSI and HSCEI are all assets that screen cheap on valuation metrics which have proven to be effective historically, and that have upside based on our underlying strategists' forecasts. Meanwhile, US equities, US credit and Brazilian equities are expensive, and our strategists are cautious about them.