Market is cheapest it’s been since the early 80’s
Posted on October 30, 2008 by Richard Beddard
Filed Under Markets |
Something momentous, at least for me. As of Friday investors are valuing the UK stockmarket at half what they thought it was worth at the beginning of the year – when I started measuring the market’s long-term price earnings ratio.
On the last day of 2007 it was worth 20 times the earnings of all listed companies averaged over nine years (less if they listed more recently). On Friday it was worth ten times earnings.
So are shares cheap? That depends on the depth of the recession we’re facing, and how far company profits fall. But the long-term price earnings ratio is, at least, a more conservative measure than the plain ordinary price earnings ratio.
The long-term PE includes earnings during the bear-market that ended in 2003 and the near-recession Gordon Brown allegedly shimmied around so, considering the future is likely to include economic woe, the long-term PE seems a safer guide to the future earning power of British companies than a recent boom year in isolation.
Here’s a chart from a note circulated by James Montier at the beginning of October:
He uses a ten-year average. By the expedient of holding the edge of a piece of paper against my computer screen, his chart shows a long-term PE of about 14 at the beginning of October (I reckon it was 13).
It looks as though the market is as cheap as at any time since the recession of the early ‘80’s. Allowing for the drop in the long-term PE ratio since the beginning of October (not on the chart), it’s considerably cheaper than in the recession of 1991.
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It’s very worrying that Gordon Brown, a man nobody in their right mind would now appoint as a referee at a tiddlywinks match, is now appointing the former finance director of Lloyds TSB, who evidently didn’t notice that they had lost about £300m, as watchdog for thre recently nationalised banks. Good thinking Gordon and Alistair. And for your next trick????????????