Stocktake: Are global stocks cheap?

The battering of European stocks mean they now look very cheap relative to history

How far stocks fall depends not only on news flow, but on valuations. Photograph:  EPA/Justin Lane

How far stocks fall depends not only on news flow, but on valuations. Photograph: EPA/Justin Lane

 

Stocks have cratered because economies are shutting down and a global recession is coming. How far stocks fall, however, depends not only on news flow, but on valuations.

Stocks were crucified during 2008-09 not only because of the banking collapse, but because equities were extremely expensive. The main reason they stopped plummeting in March 2009 wasn’t because the economic picture suddenly improved – it was because stocks hit their cheapest level in decades.

Pandemic

What about now? US stocks looked extremely pricey at February’s all-time highs; there was little room for error, not to mind a pandemic. Stocks have since plunged, but so will earnings, so you can’t say with any confidence that investors have become unduly pessimistic.

The S&P 500’s cyclically-adjusted price earnings ratio (Cape) has fallen from 33 to 24 – a big drop, but only slightly below its 25-year average. However, European and emerging markets weren’t expensive prior to the coronavirus crash.

Emerging markets had a Cape ratio of 29 prior to the 2008 crash, compared to just 15 today, while the battering of European stocks mean they now look very cheap relative to history. Is it a buying opportunity for European and emerging market stocks? “Yes”, says Research Affiliates founder Rob Arnott. “For US stocks? No.”

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
GO BACK
Error Image
The account details entered are not currently associated with an Irish Times subscription. Please subscribe to sign in to comment.
Comment Sign In

Forgot password?
The Irish Times Logo
Thank you
You should receive instructions for resetting your password. When you have reset your password, you can Sign In.
The Irish Times Logo
Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.
Screen Name Selection

Hello

Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
Forgot Password
Please enter your email address so we can send you a link to reset your password.

Sign In

Your Comments
We reserve the right to remove any content at any time from this Community, including without limitation if it violates the Community Standards. We ask that you report content that you in good faith believe violates the above rules by clicking the Flag link next to the offending comment or by filling out this form. New comments are only accepted for 3 days from the date of publication.