Merv says the ‘R’ word, market doesn’t take him seriously enough
Posted on October 23, 2008 by Richard Beddard
Filed Under Markets |
So, Merv’s uttered the word on everybody’s lips. Judging by the languid reaction of the stockmarket yesterday (at least by recent standards) it’s old news. Investors have been worrying so long about the prospect of the recession that the stock market had already dropped to a level that anticipates it.
But what kind of recession is it anticipating? Here’s a table from a note published on Monday by Soc Gen’s, James Montier.
It compares the forecast price earnings ratios of various markets and their average forecast price earnings ratios going back to the 1980s. Since the price earnings ratio is a measure of sentiment, the gap is a crude measure of investors’ pessimism. The market’s PE has dropped 20% below its average in the US, 34% in Europe, and 35% in the UK, which implies investors expect company profits to fall that much.
Would that be symptomatic of a mild recession, or something more depressing? Since the mid eighties, we have experienced two mild recessions when earnings dropped 20% in the US and 40% in Europe. Investors are anticipating mild recessions of the kind we have recently experienced.
Though he’s not making any predictions, Mr Montier says things could be much worse. Because investors aren’t preparing for the worst, I suppose the obvious conclusion is if something nastier comes to pass, the market’s got further to fall.
Footnotes:
- If you calculate the implied earnings decline from the price earnings ratios you’ll get slightly different percentages to the table. I think that’s because Mr Montier’s rounded the PE ratios.
- Update, The Economist: “Investors are well aware that the downturn will clobber corporate profits. But how great will the impact be and how much is already reflected in share prices?”
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