Sam Morse of Fidelity European (FEV ) explains he is optimistic about prospects because strong corporate earnings growth and efficiency gains justify stock markets’ current high levels.
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Some questions on valuation. We’ve mentioned the relatively low dividend yield of the market and so on – I’ll combine a couple. One viewer says: ‘You talk about growth at a reasonable price, but valuations are high. What’s the valuation of your portfolio versus a 10-year average?’ Another viewer asks: ‘Do you feel the market is expensive and are we likely to see some level of pullback in the next one or two years?’
Our valuation, as I mentioned before, Jeremy, relative to the market, is reasonable. We’re in that 80% to 100% dividend yield band, but the market looks quite expensive relative to historic levels. The good news is that coming out of the pandemic, we’re still seeing good earnings and dividend growth and we’re seeing those earnings in dividend growth being revised up. I expect that to continue. Both Marcel [Stötzel] and I feel quite constructive, unusually for me, quite optimistic about the outlook on that front because there are whole areas of the economy that still are to open up.
Marcel talked about aerospace. A number of services areas are still to come back in full form. So, that will help to continue to drive earnings. As a result of the pandemic, a lot of businesses have become more efficient through Zoom and taken out some costs on a more permanent basis. So, we feel pretty confident about the outlook and, as a result of the pandemic, consumers have built up quite a large pot of savings. We’re seeing that progressively being spent and that will continue as well.
I think markets are highly valued. That’s the corollary of low bond yields, as you know. So, there’s a big discussion about how that goes forward, but assuming no big changes on that front, then you could argue, yes, expensive, but there’s good momentum there.
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