Bubble 2008 found
Posted on May 15, 2008 by Richard Beddard
Filed Under Markets |
Then he superimposed a red line showing recent price action in emerging markets, and surprise! It looks familiar too. Investors are, he says, quite simply overpaying for growth.
Using the cyclically adjusted PE ratio, calculated using the average of many years of earnings, he says emerging markets are priced at nearly forty times trend earnings.
That’s roughly the level of the stockmarket “during the dot.com madness”.
Mind you, not all emerging countries are the same. While posterboys China and India look expensive and Brazil’s somewhere in the middle of the pack:
Turkey, Hungary, Pakistan and Korea stand out as cheap.
Footnotes:
- Societe Generale research report, 7 May 2008
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5 Responses to “Bubble 2008 found”
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Hi Richard,
I am interested in the graph but I do not get the indexes. What are the relevance of each of them?
Many thanks
Hi Robin - well I think they’re indices created by SG i.e. a bubble index (left hand side) and an emerging markets index (right hand side).
Hi Richard,
The chart is interesting but leaves me with further questions.
Firstly, as stock market behaviour is fractal in nature (i.e. self-similar) we could still be in the final leg of a bull market (à la Ken Fisher and ‘The Great Crash of 2009’).
Secondly, the chart suggests that the bubble already burst and we are on the way down. And yet a bubble is always preceded by a lot of people saying “it is different this time”. However does anyone know what “it” was meant to be?
Thirdly, the raging inflation in the emerging markets must surely make the PE ratios much less reliable to calculate, either historically or as a future earnings indicator. How sure are we that “40x”is not just balderdash?
Fourthly, the stock market trading volumes are fairly low right now and there is a huge amount of cash on the sidelines (or so I have read anyway). Is this how things pan out after the bubble bursts?
Finally, if the current economic climate causes growth to slow in the emerging markets, is this not actually a good sign for stocks historically?
So, in summary do we know if Montier has come up with any other collaborating evidence for the correctness of his chart? I would not describe him as a chart-obsessed perma bear
so I am sure he has come up with some additional evidence from the history books.
Anyway it will be interesting to see how things pan out.
Robin
The Nasdaq circa 2000 - now THERE’s a bubble, or oil now looks like a bubble. Wheat was recently a bubble or at the least overbought, gold back in the 80s, housing in the US, I think Japan’s p/e was in the 70s at one point, tech was nearer 100 as was Korea. Emerging markets were definitely looking expensive last year and now still look a tad expensive but investors hungry for growth are still buying there.
Hi Richard,
As a final addendum to this issue, if we see that there is a historical earnings growth of, say 15%, in emerging markets and you are prepared to take a conservative estimate of earnings growth to continue at 10% per year (on average) for the next 10 years then you might be prepared to pay up to 1.7 times more for emerging markets today in order to get very good earnings in 10 years time. I am not convinced that historic average earnings are relevant for emerging markets given the possible shift in economic power from West to East. Historic average earnings growth might be more relevant. Therefore, 20 times PE might be a fairer value than 40 times PE in this case.