Global equity risk premium shows an expected equity excess return over relatively risk-free government bonds. At the turn of March and April after the massive equity correction due to the global pandemic the global equity risk premium based on our financial model achieved an all-time high of 8.6 % and therefore surpassed the previous all-time high of 8.3 % from the market bottom during the global financial crisis in March 2009.
Current level of the global equity risk premium at the level of 8.0 % continues to indicate that the expected global stock market returns in the mid-term horizon are relatively vis-à-vis the relatively risk-free government bonds still highly above standard. We fully reflect this fact in our global asset allocation where we have the equity allocation significantly overweighted against benchmarks and on the contrary the fixed-income allocation significantly underweighted.
Global economy is currently in the deepest economic downturn since World War II and corporate revenues, earnings and cash flows are under enormous pressure, however we think that also due to the record low bond yields to maturity equities are currently by far the most attractive financial asset class. Expected excess return of 8 % in the mid-term horizon according to the global equity risk premium reflects this fact unequivocally.
Michal Stupavský
investiční stratég Conseq Investment Management, a.s.