16 Aug 2017 09:45
At a time when the shares are trading on a price to earnings ratio, which he considers excessively high, a manager of Manulife asset Management encourages investors to seek the values in the long term, and avoid complacency in the face of risk of stock market correction.
The expectations of investors with respect to the current momentum of the market, are they realistic, asks Paul Boyne, senior managing director and senior portfolio manager of the strategy and the team of global equities of Manulife asset Management, in the article Understand the value in a context of valuations high. «The price-to-earnings has been higher only in 1929 and 2000, the years associated with major corrections «, he writes. The ratio he uses is calculated by dividing the price of the S&P 500 by the average earnings over 10 years.
Optimism reigns on markets
«Supported by the monetary policy relaxed, the prices of the assets have increased in recent years, despite the weakness in inflation expectations,» noted Mr. Boyne. However, the optimism reigns in the markets, where investors expect stock prices continue to climb. However, the underlying components suggest that the opposite could occur. «
He took the opportunity to remind that the benefits tend to be lower than expected, and the start of a haro on the myopia room. «In this period is obsessed by quarterly results, the border which separated before the speculation of investments may have a tendency to fade. It is easy to forget that when an investor buys shares of a company, it invests in the company, and not in an index or a course; these shares represent an ownership interest in a company that is well real, which carries out its activities in a sector as complex as it is competitive. «
Distance themselves from the herd
According to the manager, investors are bombarded with information and retrained on the short-term changes, which » overlook the events that have a significant impact on the global lines of business and the inner workings of the business for the long term «.
Mr. Boyne urges investors to fight against the herd mentality and the » short-termism «. «We believe it is important to focus on the optimal balance between quality and value, because it is at the intersection of these two elements that investors are rewarded in the long term. «,- he said.
In what he calls a juncture of valuations high, Mr. Boyne finds that it is appropriate to target the actions of quality to identify those that offer significant value. In his approach, he says, invest in companies and industries, instead of betting on price changes or fads.
Deflation and Brexit
It also considers it crucial to analyze the world situation in a long-term perspective, rather than under the microscope of daily life. «Our own analysis indicates that the debt has increased, even if the profit margins seem to be close to their peak. According to us, this is a concern because current valuations are based on strong earnings growth, a perspective that we find somewhat optimistic, » he said in a bulletin on the prospects of global equities, summer of 2017.
Mr. Boyle also notes that from 2010 to 2016, us companies have contracted 7 US $ 800 billion of debt and other obligations. According to the report of the international monetary Fund, net debt median of the companies in the S&P 500 index represents almost 1.5 times the profit, which has hardly ever been as high, » notes the manager.
In addition to this, investors should pay attention to some macroeconomic problems, writes M Boyle. Deflation remains a risk, as the persistence of political uncertainty, the United States, but also concerning the coming elections in Germany and Italy, and the negotiations on the Brexit. At the same time, a feeling of malaise persists with regard to the nuclear ambitions of north korea.