When investors open notes to clients with phrases like “let there be pain”, chances are we’re in the midst of a serious market turn. And if Citi’s Robert Buckland and SocGen’s Albert Edwards are to be believed, things are going to get worse before they get better.
How much further does this year’s bear market have to run? Buckland begins by plotting a 12-month forward price-to-earnings ratio against inflation-adjusted real yields, which tend to correlate with the pace at which money is being pumped into or pulled out of markets. QE pushes up real yields and rerates equities; QT does the opposite.
With 10-year US TIPS yielding 0.3 per cent, the MSCI AC World benchmark is trading along its long-term median 12 month forward PE of 15x, Buckland says. That’s down from last year’s peak of 20x. If yields were to rise to 1 per cent, that figure would fall to around 14x.
Some stocks are more sensitive to rising bond yields than others, however. Growth investors look away now.
At the end of last year, when real yields were close to negative 1 per cent, the gap between growth and value indices stood at 16 PE points — the former trading at 29x and the latter at 13x.
Now that real yields are around 0.3 per cent, the gap has shrunk to just 10. If real yields were to rise to 1 per cent, the gap might fall to just…
