Has the bull run gone too far?
David Prosser on whether stocks still offer good value.
Are global stock markets overvalued? Well, at the very least, we can say that any adviser who told clients to follow the old adage “sell in May and go away” is currently going to be feeling a little sheepish. April’s stock market plunge, prompted by President Trump’s “Liberation Day” unveiling of global trade tariffs, was followed by four months of resurgence; markets across Europe, the Americas and Asia hit all-time highs in August.
Naturally, that has prompted concerns that equity markets have now reached valuations that can’t be justified by the earnings that individual companies are delivering. Advisers may feel wary about encouraging clients to make further stock market allocations amid these conditions, though regular savings arrangements do provide a useful smoothing effect.
Still, it’s not a straightforward question. One counter argument for those who think equities have risen far enough is that not all markets are equal. Another is that certain funds are particularly adept at hunting for good value, even in a toppy environment.
The S&P 500 Index currently trades on a price to earnings ratio of 24; the corresponding figure for the FTSE 100 is 14.
David Prosser
On the first point, try contrasting the US and the UK, for example. The S&P 500 Index currently trades on a price to earnings ratio of 24; the corresponding figure for the FTSE 100 is 14.
Now, there are some good reasons for this discrepancy – the US’s concentration of big tech businesses, which have seen spectacular gains, for example – and the US has historically traded on higher multiples. Even so, the UK still provides comfort on the “rule of 20” perspective; first popularised by the legendary fund manager Peter Lynch, this is the principle that a market or share offers value if its PE ratio, plus the current rate of inflation, is lower than 20.
As for value-hunting funds, consider the likes of Temple Bar Investment Trust and Fidelity Special Values, both of which have a long record of sniffing out attractively-priced businesses even when a broader market bull run appears to be looking long in the tooth. At both these investment trusts, the managers have said recently that they are still finding opportunities to invest in securities that offer good value.
More broadly, investment trusts as a whole could be a potential value play. Excluding 3i, the investment trust industry currently trades at a discount to net asset value of around 14%. That has barely changed since the beginning of the year, suggesting that the market’s strength has not yet had a discernible impact on valuations in the investment trust sector. Asset prices and share prices have risen in tandem, rather than seeing the latter leap ahead through a narrowing of discounts.
Advisers, of course, have enough expertise and experience not to try to time the market. They won’t have had their heads turned by the market highs of recent weeks, just as they didn’t panic when April’s falls hit their clients.
Still, current market conditions make for an interesting debate for anyone thinking about how and where to allocate investment cash in the coming months. Periods of strong stock market performance often last far longer than expected – hearts tend to rule the heads of many investors – so those who lose their nerve can risk missing out on further gains. At the same time, it makes sense to explore those potential value opportunities.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
