Quote from ASusilovic:
Many investors believe the 38% rise in the markets since the
low is incompatible with the prospects of weak economic
growth. We believe that valuation already reflects these
fears. On our top down estimates, DJ Stoxx 600 trades at
10.4x 2010 earnings. The market appears to be implying a
2.6% 5-year annualised earnings decline on normalized ERP.
Valuation based on earnings and dividends is attractive
On most measures we look at, valuations appear to be very attractive. On
our top down earnings growth forecasts for 2010 (+34%), the market trades
at little more than 10x earnings. Based on real trend earnings since 1980,
the market trades on 9.5x or 11x ex-financials. On a cyclically adjusted
Shiller multiple, the market is on 11.8x 2010E compared with a long run
average of 15x. Adjusting for inflation, the current multiple is the lowest
since the 1970s.
Relative valuations remain compelling
Valuations relative to competing asset classes are also compelling. Even
taking into account further sharp falls in dividends implied by the dividend
swap market, the yield ratio is close to the lowest level in the UK since the
1950s. Meanwhile asset and enterprise based measures remain at the low
end of their long run ranges â the P/B is 1.5x, EV/sales is 1x and EV/GCI is
0.8 on our 12-month forward estimates.
