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Why crazy valuations could stick around for some time yet

05082019_Crazy Valuations

Why crazy valuations could stick around for some time yet

It’s hard not to be puzzled by the parallel existence of sluggish global growth and record-breaking markets. But with interest rates set to remain low into the foreseeable future, it looks like this period of crazy valuations has more time to run.

Amid elevated if not euphoric valuations in some corners of the market it has been easy to say it’s all going to end in a spectacular pile of painful capital losses. More challenging has been swimming against the rising tide of market prices. But more challenging again is an unbiased exploration of the arguments in favour of a continuation of the present support for even profitless companies.

An increasing frequency of commentary suggests low rates are now a permanent feature of markets, as is the likelihood of central banks rescuing investors from themselves through the perpetual deployment of unconventional monetary policy tools. It’s relatively easy to dismiss these claims as examples of ‘this time it’s different.’

When rates are low, the market places more value on future growth. Table 1 below shows that when discount rates fall, the increase in valuation is greatest for earnings that are further out.

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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. 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.

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Comments

  1. Hello Roger: It seems to me you’ve incorrectly included Appen among the “profitless” companies, but it made net profit of ~$40 million last report, and has been profitable since 2013.

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