The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.
Capital Markets

Equity valuation: Where’s the bottom?

The endless series of new index lows has repeatedly confounded investors who see equities as having become cheap again. The rally at the end of last year has raised hopes once more that valuations might have found a bottom. However, for some leading strategists, what looks like cheap today may not be cheap enough.

Despite the last week of November offering the best week for stocks for about 75 years, the bear market rally has struggled to gain traction.

"Sure equities are cheap compared with where they were a year ago when people were already saying that they were cheap enough to withstand a recession but equities are a lot cheaper now," says Albert Edwards, chief investment strategist at SG CIB. "The problem, however, especially for the US, is that we had a valuation bubble that peaked in 2000 and which has been structurally de-rating since. Cyclically adjusted P/E ratios in the US are still 40% too expensive in our view."

"The rally between 1982 and 2000 was P/E-driven rather than earnings or dividends-driven. Lower inflation led to lower bond yields, which, in turn, drove equity multiples substantially higher. P/E expansion accounted for well over half of the capital gain of equities during these years. In that environment, people didn’t care about dividends because they earned their risk premium from capital gains. Now that the P/E expansion is over, however, the market will expect to earn its risk premium through dividends. If companies don’t have the cash for that, prices will continue to fall, the way they did in Japan."

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree