Chart of the week: Is the global share rally more hope than experience?
18 April 2019
Bob Cunneen, Senior Economist and Portfolio Specialist
Global Shares Forward Price-to-Earnings Ratio
Source: IBES and Datastream.
Global share prices have surged back in 2019. The painful final months of 2018 are only a distant memory for investors. US share prices as measured by the S&P 500 Index are up by nearly 16%, German shares (DAX) are up by 14% while Chinese shares (MSCI China Index) are up by 22%.
A rising tide of positive news has provided hope this year. The US central bank has declared that interest rates are on hold. President Trump and President Jinping have suggested progress in the US – China trade negotiations. Even the Chinese economy shows signs of stable economic growth after concerns that credit conditions were tight.
Yet a very simple measure of share valuations suggests that investors may need to be more cautious. The Forward Price-to-Earnings (Forward P/E) measures the ratio of current share prices to expected corporate earnings in a year’s time. Ideally an investor wants to buy at a low Forward P/E while selling out at a high P/E. Currently most markets are above their past decade’s average for the Forward P/E. The US share market (blue line) is particularly expensive with a Forward P/E of 16.7 versus the decade average of 14.7. Even emerging markets (green line) - which includes developing nations such as China - has a Forward P/E of 12 that is above the decade average of 11.1. So investors need to be careful that the current positive thinking on global shares does not become wishful when the tide turns.
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