THE NASDAQ may have passed its record high, although like London's FTSE 100 it took its time about doing so; 15 years, to be precise. So much for the mantra that shares are always the best long-term investment; Japan's Nikkei 225 just celebrated its achievement in reaching 20,000, just over half its 1989 peak.
Share are being propped up by the lack of decent alternatives; investors think bonds are overvalued and cash yields zero, or less. They may also worry that shares are overvalued, but while monetary policy remains supportive, they are not worrying too much.
But what is the value of a share? Theory states that is the value of all future cashflows, discounted at the appropriate rate. Estimating those cashflows, and deciding on the right discount rate, is a very difficult task. So investors use rules of thumb - notably the ratio of the share price to past profits (the historic p/e) or, when they are bullish, the ratio to future profits (the prospective p/e). The outlook for profits, one would have thought, is pretty fundemantal. Hence this comment from Citigroup's strategists
the MSCI AC World is trading at a higher PE (18.5x) than its 16.7x peak in October 2007. This is a concern for some, although we would point out the current PE is not especially high compared...Continue reading
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