Investor's window  |  December 10, 2012 11:04:35

What is the fair valuation of equity markets?

Stock markets across the developed world is undergoing a very favorable period. The German DAX index is only 1.6% below the peak reached in 2011 and 7.3% below the historic highs of 2007. American index S &P 500 shows similar information. Currently is 3.7% below this year's peaks and 10% below the global peak in 2007. Are the current values ??justified and sustainable? It is time to change the trend, or investors should follow the rule "the trend is your friend".

Macroeconomic indicators of major economies in recent weeks show a slight recovery. One of the most important indicators is the indicator of industrial activity, which, after several months of decline has stabilized around the level of 50 points (Germany stabilized around 47 points). For example, an indicator of the unemployment rate, which on Thursday came from the U.S., significantly positively surprised. An interesting view is the Chinese macro data in recent weeks, indicating that its economy after months of decline rebounding.

PMI indicators of industrial activity

Source: Bloomberg, as Cyrrus

Another ceiling on the current market valuation can be compared to history. While analysts' expectations on earnings per share in the S &P 500 in the next year, which currently amounts to $ 114.9, the index is now valued at 1.3% discount to its long-term average. As the macro data, as well as a comparison with the history thus speak for themselves: markets are set very optimistic. Condone but investors uncomfortable?

In a situation where European politicians still have not set clear contours of the solution to the debt crisis, the bankruptcy of Greece is constantly delayed, the request for a bailout of Spain is still imminent and the United States may fall acutely from a fiscal cliff, optimism in the markets despite the support of central banks in my opinion too much.If we admit that all the above-mentioned problematic issues successfully resolved, then I present level indices considered adequate. However, the current risks are significant and also poorly predictable, so I would consider a fair level of 10% discount from the long-term average, which would imply a price index, the S & P 500 at 1,290 points, ie 8.8% below the current values.

However, each investor has a different set of risk perception. Currently clearly dominate the markets, those who believe in the successful resolution of most of the problems described above. I would personally be more careful and long-term long positions would not enter now.

Tomáš Menčík, CFA
Cyrrus analyst

Marek Hatlapatka (1978)

He graduated from the Economics Faculty of the Technical University of Ostrava, completed a 3-month internship in London and Intensive fundamental analysis under the leadership of former chief analyst of Erste Bank Galea Kirking. In a society CYRRUS, as is employed since 2006, when he took the place of the analyst equity markets with a focus on foreign markets, pharmaceutical and banking sectors. Subsequently he specialized in banking, electricity and coal mining in these sectors is now one of the most sought after professionals in the Czech Republic. In 2008 he became head of the analytical department of the company CYRRUS, as in this position works even today.Long been one of the most cited Czech economists, in 2010 became the fourth most cited economist in the Czech media.

CYRRUS Company, Inc., is a licensed securities dealer. The company was founded in 1995 and is currently the largest non Prague brokerage companies. It is a member of the Stock Exchange Prague Stock Exchangein Warsaw. CYRRUS Company, Inc., provides comprehensive services in the capital markets, private and corporate clients, focusing on the Exchange trading system SPAD Prague Stock Exchange and trading on foreign markets in Poland, Hungary, Turkey, Germany and the USA. The company is one of the most important Czech businessmen with investment certificates.

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