Valuations are a welcome boost for markets
PICKING the bottom of the market can be a fool’s game, especially in the capricious times we live in. But after a 14 per cent fall in the S&P 500 in recent weeks, valuations are at deeply attractive levels.
But is this just low hanging fruit that is too good to be true? No, according to Pierre-Yves
Gauthier at Alphavalue, the equity research house. Gauthier has calculated that European
stocks (excluding financial companies) have an average price-to-earnings (P/E) ratio for 2010 of 12.5, and 10.5 for 2011. “We see the potential upside for stocks as the same as where we were back in March 2009 (when the market bottomed after the financial crisis). When valuations are this attractive there doesn’t even need to be a catalyst for stocks to appreciate,” Gauthier says.
Other technical indicators are also pointing to oversold equity markets. The bond-equities earnings yield, see chart, has also fallen to lows not seen since the peak of the financial crisis. This ratio falls when equities’ earnings yields rise. Mike Lenhoff, chief strategist at Brewin Dolphin, says that when equity yields are compared with US dollar investment grade corporate bonds, this ratio is actually at its lowest level for two decades: “On this metric the valuations for equity markets are seriously compelling.”
Lenhoff argues that a strong earnings season could push stocks up for the rest of the year, and notes that this would make “our year-end target for the FTSE 100 of 5,500 look like something to go for”.
Markets are pricing in a very depressing earnings season. Even if the economy slips into a double-dip, equities should be okay. Research by Saxo Bank has found that corporate earnings tend to perform better during the second downturn compared to the first. Alphavalue’s Gauthier points out that during the 2008-2009 downturn, profit margins only decreased by 1 per cent, which bodes well if the global economy dips for a second time.
But where should you invest? Charles Lahr, executive vice president at Pimco, says that European equities are more attractive than their counterparts in the US; for example, compared to the S&P 500, which has fallen 14 per cent since April, equity indices in Milan and Greece have fallen 19 per cent and 25 per cent respectively. “If you are a long-term investor, buying names cheaply in Europe (have) the potential to appreciate over time as the market learns that these names actually aren’t that exposed to the negatives of Europe,” Lehr says.
Generations of investors have made their fortunes adhering to the motto “buy low and sell high”. According to this proven formula, now is the time to go long equities.
Valuations are a welcome boost for markets
PICKING the bottom of the market can be a fool’s game, especially in the capricious times we live in. But after a 14 per cent fall in the S&P 500 in recent weeks, valuations are at deeply attractive levels.
But is this just low hanging fruit that is too good to be true? No, according to Pierre-Yves
Gauthier at Alphavalue, the equity research house. Gauthier has calculated that European
stocks (excluding financial companies) have an average price-to-earnings (P/E) ratio for 2010 of 12.5, and 10.5 for 2011. “We see the potential upside for stocks as the same as where we were back in March 2009 (when the market bottomed after the financial crisis). When valuations are this attractive there doesn’t even need to be a catalyst for stocks to appreciate,” Gauthier says.
Other technical indicators are also pointing to oversold equity markets. The bond-equities earnings yield, see chart, has also fallen to lows not seen since the peak of the financial crisis. This ratio falls when equities’ earnings yields rise. Mike Lenhoff, chief strategist at Brewin Dolphin, says that when equity yields are compared with US dollar investment grade corporate bonds, this ratio is actually at its lowest level for two decades: “On this metric the valuations for equity markets are seriously compelling.”
Lenhoff argues that a strong earnings season could push stocks up for the rest of the year, and notes that this would make “our year-end target for the FTSE 100 of 5,500 look like something to go for”.
Markets are pricing in a very depressing earnings season. Even if the economy slips into a double-dip, equities should be okay. Research by Saxo Bank has found that corporate earnings tend to perform better during the second downturn compared to the first. Alphavalue’s Gauthier points out that during the 2008-2009 downturn, profit margins only decreased by 1 per cent, which bodes well if the global economy dips for a second time.
But where should you invest? Charles Lahr, executive vice president at Pimco, says that European equities are more attractive than their counterparts in the US; for example, compared to the S&P 500, which has fallen 14 per cent since April, equity indices in Milan and Greece have fallen 19 per cent and 25 per cent respectively. “If you are a long-term investor, buying names cheaply in Europe (have) the potential to appreciate over time as the market learns that these names actually aren’t that exposed to the negatives of Europe,” Lehr says.
Generations of investors have made their fortunes adhering to the motto “buy low and sell high”. According to this proven formula, now is the time to go long equities.