Investors return to P/E ratios, gingerly - guardian.co.uk
Investors return to P/E ratios, gingerly guardian.co.uk, UK But now they have," said Georgina Taylor, strategist at Legal & General Investment Management. "Once we're past asking how strong the recovery is going to be -- then we ask 'Where are the bargains? Where is the value?' Valuation metrics like P/Es ... |
Source: guardian.co.uk
Comments
Simon James, Gore Browne Investment Management, 2009-06-29 09:09:40
Metrics requiring comparison with the past always lose validity during times of market and economic dislocation. Most investment professionals use a range of metrics, and those used will vary from sector to sector.
Everyone should however continue to be wary of using historical comparisons.
Many comparisons of a stock's p/e for example are made with the average of the last 10 or 20 years. However the period from roughly 1980 to 2000 represented what was for most of us probably the biggest bull market of our lives.
P/e ratios expanded as inflation and then interest rates fell, while corporate returns accelerated and reached historically high levels.
Companies are now becoming less geared, which will reduce their financial returns, and their growth rates. Meanwhile inflation and interest rates are not likely to fall much from here!
It is now better to focus upon sustainable returns from companies with strong excess cash flow generation, which pay dividends.