Albert Edwards, the widely-followed bearish strategist at Societe Generale, confused and surprised many people when he said European stocks were “unambiguously cheap.”
However, this quote was clipped from an investment strategy conference that wasn’t covered very closely.
In a new note to clients, Edwards aims to explain what he meant.
“Investing say, in European equities, on a 10 year view at current valuations will probably result in good long term returns the single biggest determinant of long term returns being the valuation at the entry point,” he writes. “That view has not changed.”
But this is not to say that he has turned any more bullish on stocks as an asset class.
“Now I dont and didn’t claim any great conversion towards being bullish on equities overall and you will notice our recommended equity weighting remains a rock bottom 30%,” he continues. “That is because ours is a global index stance and that stance is dominated by what we believe is a continued extreme overvaluation in US equities.”
Edwards relies heavily on cyclically adjusted price ratios to value stock markets. This measure considers long-term averages.
On this basis, he think that U.S. stocks are way overvalued and that at these levels they will “undoubtedly drag down the entire equity complex.”
Here’s a chart he refers to:
Photo: Societe Generale
Ultimately, he is not a fan of stocks right now and he thinks they can get a lot cheaper.
“We expect more “once in a generation” opportunities to buy cheap equities lie ahead,” writes Edwards.