## Multiple expansion precedes earnings growth
Source: Bloomberg, ING IM (July 2014)
## The first driver of valuations: the earnings cycle
## The second driver of valuations: the monetary cycle
## The third driver of valuations: the trend in perceived risks
The third driver is the trend in perceived risks coupled with the price investors are charging to take on this risk in their portfolio, the so-called required risk premium. Of course, risks reside in every corner of the spectrum but over the past years systemic, economic and geopolitical risks made the headlines. Systemic risks have certainly come down in developed markets, although in China they have probably risen. In Europe, all skies are not clear yet but a breakdown of the Eurozone is evaded and large imbalances between core and peripheral countries are fading.
The improvement in the global cyclical indicators reduces the economic risks and hopes are running high that central banks will manage to cope with deflation risk. Geopolitical risks are present as always but recent developments in the Ukraine move into the right direction. Up until now the unrest in the Middle-East has had no significant impact on oil prices. So, overall in our view risks have come down.
## The final driver of valuations: relative valuation
## We continue to prefer equities in Eurozone and Japan