In continuing with the series, I like to draw attention to the valuations of the STI Index, which notoriously received the dubious distinction of having as bad a year as Greece.
It’s probably worthwhile to note that the last 5 years have not been by any measure a particularly exuberant time in the stock market (especially in comparison to 2005 – 2007).
This lower valuations have also resulted in a corresponding surge in the dividend yield of the STI to close to 4%, a near record high.
Some large capitalization stocks are extremely cheap, trading at close to 2008 levels.
CAN STOCKS GO LOWER?
Sure.
But I would argue that hoping for the bottom in 2008 valuations is a case of being penny wise pound foolish. Risk reward ratios are skewed towards risking 10 cents on the dollar to make 50 cents to a $1.
We should probably bear in mind that the 2008-2009 crisis was a crisis that it rivalled the Great Depression, so whether one should expect that kind of valuation levels to materialize is up to debate.
Personally, we haven’t seen the mad excesses of the 2005 – 2007 period, and certainly none of those seen in the run up to the 1997 crisis.
Source : Emerging Perspectives
And how about the rise of interest rates in the US which is widely believed to bring about the ruin for corporates? Well… the available data we have on instances where interest rates have risen do not actually support that conclusion.
Source : Emerging Perspectives
Source : Emerging Perspectives
In the end valuations are what drives the long run stock market returns. And by this measure, emerging markets are cheap (Singapore stocks are priced similarly).
JP Morgan Market Insights
FINAL THOUGHTS:
All that is required now is patience and fortitude of character. Markets have always been volatile – something that investors in stocks must come to terms with one way or the other.
Cheap valuations do not mean stock prices go up straight away.
However, in my view, investors have the odds stacked heavily in their favour. If investors can be calm and cool-headed as others panic in the next few months, than they can look forward to satisfactory returns in the coming years.
