What can we expect from equities in the near future?
Some commentators, pointing to the price to earnings (P/E) ratio for major indices like the S&P500, argue the next decade will be terrible for equities. Are they right? There are always plenty of people happy to offer their opinion.
The question itself is perhaps not right because most serious equity investors tend toward investing in companies, not the index.
Nevertheless, and remembering the lower the price you pay, the higher your return, it helps to have a framework for thinking about market value. What return might the market, or investing in shares generally, offer an investor commencing today?
Before answering that question, let me summarise how we arrived at this point with respect to the stock market and interest rates.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Max Zan
:
Hi Roger
Share investing has always been about buying a good “Business” at an attractive valuation and with a decent margin of safety attached. It sounds easy in theory, but not fool proof as the future is very much unknown. You only have to look at the recent price falls in the share prices of CSL and Resmed to see that even very good Businesses and Market darlings can suffer setbacks. I have never owned those companies as I always saw the market prices in recent years trading for perfection. The other issue with a company such as CSL is that the sheer size of it’s Market Capitalisation makes it more difficult to achieve reasonable Growth rates to justify the high PE multiple it has been trading at. Smaller Companies offer better opportunities for Growth as they are starting off from a low base, but at the same time many see them as being more risky than blue chips. I suppose it comes down to being very selective especially considering where 10 year Bond rates are sitting at present. If you can earn 4.5% in a risk free investment like 10 Year Aussie Government Bonds (PE equivalent of 22.2 Times) then you have to be very confident about growth rates when Companies are trading at very much higher PE multiples . I still don’t think the prices of some Companies have adjusted to the current higher interest rate environment. It’s possible rates will fall eventually, but I agree with you that it’s unlikely that will happen any time soon. We live in interesting times and compensation for risk taking needs to be adequate.
Roger Montgomery
:
Thanks Max, Perhaps after the recent slump CSL and Resmed are now smaller with a “lower base”? It’s especially interesting if you believe Ozempic isn’t the final solution to weight loss. Agree with you on the other comments, which is why our Aura Private Credit Fund, which has been earning 9.6% per year, generating monthly income, with no negative months over six years, is gaining traction.