Why value matters in investing - and what are valuations telling us now

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Key points Starting point valuations - like yield and price-to-earnings ratios - are key drivers of medium-term investment returns. Valuation starting points for term deposits and bonds have improved...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nWhy value matters in investing - and what are valuations telling us now\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-10-30 04:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://www.livewiremarkets.com/wires/why-value-matters-in-investing-and-what-are-valuations-telling-us-now><strong>LiveWire</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Key points\n\nStarting point valuations - like yield and price-to-earnings ratios - are key drivers of medium-term investment returns.\nValuation starting points for term deposits and bonds have improved...</p>\n\n<a href=\"https://www.livewiremarkets.com/wires/why-value-matters-in-investing-and-what-are-valuations-telling-us-now\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"FOMO","symbol_name":"FOMO ETF","start_time":0,"source_url":"https://www.livewiremarkets.com/wires/why-value-matters-in-investing-and-what-are-valuations-telling-us-now","article_id":"2479225308","we_media_id":null,"thumbnails":[],"rights":{"source":"livewire_stock","url":"https://www.livewiremarkets.com/wires/why-value-matters-in-investing-and-what-are-valuations-telling-us-now","rn_cache_url":null,"directOrigin":true},"url":"https://stock-news.laohu8.com/highlight/detail?id=2479225308","pubTimestamp":1730232014,"sourceInfo":{"source_id":"livewire_stock","name":"Livewire Markets"},"weMediaInfo":null,"summary":"Starting point valuations - like yield and price-to-earnings ratios - are key drivers of medium-term investment returns.Valuation starting points for term deposits and bonds have improved. For shares, they suggest constrained return potential, particularly from US shares but Australian, European and Chinese shares are a bit more attractive.The concept of value or valuation is central to investing as the cheaper. you buy an asset the higher its prospective return might be. However, this. is frequently forgotten with investors tempted to project recent returns. into the future regardless of valuations and periodically – usually after. periods of strong gains – some argue that they don’t matter anymore. But. looking at value now is pertinent as shares have had a good run and on. recent Goldman Sachs study concluded that based on current valuations. along with various other variables US shares will return around just 3% pa. the income flow an investment will produce. This makes the valuati","collect":0,"end_time":0,"defaultTopTitle":"livewiremarkets.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"FOMO":"FOMO ETF","XAO.AU":"标普/澳交所 普通股指数","XJO.AU":"标普/澳交所 200指数","XKO.AU":"标普/澳交所 300指数"},"translate_title":"为什么价值在投资中很重要——估值现在告诉我们什么","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"FOMO":1,"XAO.AU":0.9,"XJO.AU":0.9,"XKO.AU":0.9},"content_text":"Key points\n\nStarting point valuations - like yield and price-to-earnings ratios - are key drivers of medium-term investment returns.\nValuation starting points for term deposits and bonds have improved. For shares, they suggest constrained return potential, particularly from US shares but Australian, European and Chinese shares are a bit more attractive.\n\nThe concept of value or valuation is central to investing as the cheaper \nyou buy an asset the higher its prospective return might be. However, this \nis frequently forgotten with investors tempted to project recent returns \ninto the future regardless of valuations and periodically – usually after \nperiods of strong gains – some argue that they don’t matter anymore. But \nlooking at value now is pertinent as shares have had a good run and on \nsome measures are stretched – particularly for US shares. For example, a \nrecent Goldman Sachs study concluded that based on current valuations \nalong with various other variables US shares will return around just 3% pa \nover the next 10 years.\nCash & bonds offer better returns than three years ago \nBy its nature valuation is a relative concept usually expressed relative to \nthe income flow an investment will produce. This makes the valuation of \ncash and bonds relatively simple but for shares it can get more slippery \nand for things like gold and Bitcoin it can get really hard as there is no real \nincome. The good news for cash and bonds is that the rise in interest rates \nsince 2022 has improved their valuations as they are now providing more \ninterest income. That said term deposit rates are still well below levels \naround 6-7% in 2010 and have started to soften ahead of RBA rate cuts. \n\n\n\n\n\n\n\n\n\n\nFor government bonds, their yield is a good guide to starting point value \nand hence medium-term return potential. If the yield on a 10-year bond is \n5%, and you hold the bond to maturity, your return will be 5%. Of course, \nthe relationship is not perfect but it’s a very good guide. This can be seen \nin the next chart which shows a scatter plot of Australian 10-year bond yields since 1950 (horizontal axis) against subsequent 10 year returns \nfrom Australian bonds based on the Composite All Maturities Bond index \n(vertical axis). When bond yields are low, they set up low bond returns \nover the medium term and vice versa. For example, at their low point of \n0.6% in 2020, 10-year bond yields were pointing to very low returns but \nthey are now 4.5% pointing to better returns, albeit still historically low. \n\n\n\n\n\n\n\n\n\n\nFor shares, the lower the PE (or the higher the \ndividend yield) the better \nFor shares a similar relationship holds. The following chart shows a scatter \nplot of the price to trailing 12 months earnings ratio for US shares since \n1900 (along the horizontal axis) against subsequent 10-year total returns \n(i.e. dividends plus capital growth) from US shares. While the relationship \nis not as smooth as for bonds, as share returns are more complicated, it is \na negative relationship. So, when share prices are high compared to \nearnings, subsequent 10-year returns tend to be low and vice versa.  \n\n\n\n\n\n\n\n\n\n\nThe next chart shows the same for Australian shares from 1962, which is \nas far back as we have PE data for. Again, the relationship is negative \nbetween the level of the PE and subsequent total returns (based on the \nAll Ords Accumulation Index) with the best returns coming after periods \nof low PEs. For example, at the end of the mid-1970s bear market the PE \nwas just 5.4 times and shares returned 21.8% pa over the next decade!\n\n\n\n\n\n\n\n\n\n\n There is dividend yield data for Australian shares from 1900 and as \nexpected the higher it is the better the subsequent 10-year return. \n The key is that the starting point value matters a lot – the higher the yield \nand the lower the PE (for shares) the better for medium term returns. But \nbehavioural finance tells us that it’s natural for investors to pay too much \nattention to recent performance, so after a run of strong years investors \nexpect it will continue and fear they will miss out (FOMO) if they don’t get \nin. This leads many to buy only after good times, only to find they have \nbought when shares are overvalued, and they find themselves locked into \npoor returns. And vice versa after a run of poor returns. \nValuation is not a perfect guide to share returns\nOf course, share market valuations can have their own pitfalls. \n\nFirst, you need to allow for risk as sometimes assets are cheap for a \nreason. This can be an issue with individual shares, e.g. a tobacco \ncompany subject to lawsuits even though current earnings are fine. \nSecond, valuation is a poor guide to market timing, often being out by \nyears. Eg, many have pointed out over the last few years that US tech \nshares are overvalued only to see them keep outperforming. \nThird, there is a huge array of valuation measures for shares. For \nexample, the “earnings” in the PE can be actual historic earnings as \nreported for the last 12 months, consensus earnings for the year \nahead or earnings that have been smoothed to remove cyclical \ndistortions. All have pros and cons. \nFinally, the appropriate level of valuation will vary with inflation and \ninterest rates. In times of low inflation, assets can trade on lower \nyields as the yield structure in the economy falls, uncertainty falls and \n(for shares) the quality of reported earnings improves. This means \nhigher PEs. The shift from the high inflation and interest rates of the \n1970s and 1980s to very low inflation last decade was very positive \nfor shares. But if inflation rises resulting in higher interest rates, this is \nbad news for shares as we saw in 2022. Fortunately, inflation is now \non the way back down again allowing higher PEs. \n\nCurrent share market valuation signals \nIt’s hard to avoid the conclusion that rich valuations point to a period of \nlower returns over the next decade or so for US shares. This is evident in \nthe relationship between PEs and subsequent share market returns seen \nin the third chart in this note – with the current US PE of 26 times pointing \nto an average return over the next decade of around 3% pa – see the red \nlines on the chart (although there’s been a big range around this). US \nshare market concentration in IT is a concern as the Goldman Sachs \nanalysis pointed out. IT shares are now nearly as big a share of the US \nmarket as they were at the tech boom peak in 2000. This is a concern as \nit’s hard for a handful of stocks to sustain their strong profit performance. \nThat said at least tech stocks are earning strong profits now - with Nasdaq \non a 41 times PE versus around 100 in early 2000. \n\n\n\n\n\n\n\n\n\n\nSimilarly, the risk premium the US share market offers over bonds – \nderived by subtracting the 10-year bond yield from the earnings yield \n(using forward earnings) – is now zero, which is well below the 3 to 4% \noffered over much of the period since the GFC.\n\n\n\n\n\n\n\n\n\n\nFortunately, valuations for other share markets are not as stretched: \n\nAustralian shares are trading on a PE of 21 times which based on the \nhistoric relationship with returns seen in the fourth chart in this note \npoints to a medium-term return of around 8% pa. That said, like the \nUS it offers a relatively low risk premium over bonds (see chart above) \nEurozone shares are trading on a PE of around 15 times and offer a \n4.6% risk premium over German bonds (see chart above). \nChinese shares are trading on a PE of around 16 times (and lower \ndepending on the index used) and provide a relatively high risk \npremium over bonds (see chart above). \n\nImplications for investors\nStretched US market valuations have several implications for investors. \n First, they leave shares vulnerable to a fall particularly given that the risk \nof recession still remains high, the expansion of the war in the Middle East \nstill threatens to impact oil supplies (although Israel’s “restrained” \nresponse to Iran’s missile attack points to de-escalation for now) and a \nTrump victory in the US election will likely spark another trade war. \nSecond, it provides a reminder that share market returns won’t be \nsustained at double-digit levels indefinitely.  \nThird, given the relatively stretched nature of the US share market and \ntech stocks in particular there is a case to consider a reduced allocation to \nUS shares in global share portfolios. \nFinally, it’s worth bearing in mind that timing this is likely to be hard. \nWorries about the US share market’s dependence on tech stocks are not \nnew and they have kept going for longer than many thought. \nOur view remains positive for shares on a six to 12-month view as central \nbanks cut rates and recession is avoided, but stretched valuations in the \nkey US share market point to more constrained returns with higher risk. \n\n \n\n\nNever miss an update\n\n    Enjoy this wire? Hit the ‘like’ button to let us know. \n    Stay up to date with my current content by \n    following me below and you’ll be notified every time I post a wire","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2479225308"}