Back to Fundamentals: MSCI World Index & AC Asia Ex Jap

As part of my annual fundamental analysis for the MSCI World Index and AC Asia Ex Jap, I like to examine the Price and Earning behavior of the broad indexes (from 2005 to 2020).

I figured that some of you might want to know what the behavior looks like so yeah, here you go. You’re welcome :P

A short commentary is also provided at the bottom of the article :)

(all information are extracted from Bloomberg terminal as of 6 January 2021)

MSCI World Index

MSCI AC Asia Ex Jap

Commentary

Overall, the behavior of both broad markets is somewhat similar over the past 15 years.

Earnings:

Earnings had been on a steady growth trajectory until 2018 from which both markets started to experience a slow down in the earnings. This can be attributed to the start of the trade war and escalating tension among the global powers.

Prices:

The market participants appeared to be still sane as of 2018 as they continued to price in the deterioration in fundamentals. However, things changed in 2019 as the divergence between price and earnings grew larger every day.

In 2020, we experienced the COVID-19 Pandemic crash during the first half of 2020 followed by a tremendous rally in the second half of 2020. This can be attributed to numerous factors from which I’ve talked about it in my 2020 Annual Review. 2021 Market Expectations.

Valuations:

With regards to valuations, what I like to do is to use rolling three-year earnings and recalculate the price of earning behavior so as to mitigate the short-term volatility and seasonality in earnings.

Based on the findings above, here are some of my conclusion:

While the one-year Price to Earning (P/E) and Price to Book (P/B) valuation metrics are off the charts, if we look at it from a rolling three-year P/E perspective it doesn’t look that stretched.

Personally, with respect to Price to Earning, I’m okay with anything that’s between the range of 15-20 depending on the underlying instrument (growth/value/etc). As such, both the Global and Asia equities – more so the Asia equities - checks out from this angle.

Moving forward, here are plausible scenarios and how I would react to them in the short-term tactical asset allocation:

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