A just-published report updated our multi-asset portfolio recommendations, noting that the recent rise in G7 government bond yields was threatening to trigger another risk-off phase.
Last year’s surge in bond yields crushed risk asset markets despite positive corporate earnings results. Higher bond yields in the past month has so far corresponded with only a slight increase in the global 12-month forward earnings yield (or lower P/E ratio). This underscores the growing vulnerability of global equities if G7 bond yields climb further, as we ultimately expect will occur.
More worrisome for stocks is the fact that the earnings yield is at the low-end of its range over the past year, while the G7 10-year government bond yield is significantly higher. The global earnings yield has thus fallen sharply relative to bond yields, implying that relative valuation is moving against stocks compared with bonds. To this end, we have a downgrade bias in terms of equity positions, while still favoring the euro area and EM over the U.S. Meanwhile, we remain bearish on bonds, and are still underweight within a multi-asset portfolio.