Thanks BlackPeter. The 2.9% interest includes what companies must retain for all manner of reasons too and even considering that it's still comparative to a term deposit. So from here companies earnings must rise significantly to justify current prices (which doesn't seem likely). So can we conclude that even considering record low OCR the valuations are very high? I think current PE is around 24 so if 1 year forward is predicted at 33 that means falling earnings.
As buffet says, any investment is worth all the cash you’re going to get out between now and judgment day discounted back. The discounting back is affected by current interest rates. So the lower the interest rate the higher the value of a cash stream from shares.
Anyone have any insight or opinion as to the effect of all time low bond yields/OCR on the PE of the NZSX50?
Thanks in advance.
the biggest impact is on valuations of companies with defensive characteristics ( those with more reliable income streams) eg utilities , consumer staples , real estate. In this environment good reliable income means the valuations of companies with this will increase as the discount rate declines. nzx pe on average is high ( on past metrics , or could be considered low on current valuations using a lower discount rate) because a large portion of the market has defensive type stocks. if rates stay low for a long time share prices of these companies will stay what some people call elevated for a long time or some people might push them even higher as they still consider them cheap on ever declining discount rate based on income streams. if rates increase one day obviously the reverse will occur and these stocks may decline due to discount rate increasing. black swan events mean everything declines. at the end of the day with the market it depends how you value a stock to what you think its worth there is no golden rule.
One thing with interest rates going lower is expected returns from most asset classes (including equities) go lower as well
Low interest rates is a sign economies are struggling - company profits struggling etc etc - and equity prices have been bid up
fair point about most stocks except those with reliable income streams. as we dont know exactly what the future of world growth is maybe we should assume a possibility of a low growth low rate environment? therefore eps of companies will hardly grow but hardly decline either? so many possibilities eh maybe why defensives are so sought after at the moment.
Forward EPS for NZX is 4% ...not much is it with such a high relative PE to the rest of the world
Doesn't that chart you attached say negative 4% Winner?
Yes it does seem we are an outlier, I've been doing some research on this index P/E ratio (not sure if that chart is for the top 50 index or the whole). There are some outliers with large market caps that skew the ratio up significantly due to large amounts of CAPEX which are now bleeding off earnings but not cash-flow so much. As well as companies like infratil with it's huge PE.
I've tried to rationalise the high PE by comparing it to P/Free cash flow but it's not easy for an index.
Forward EPS for NZX is 4% ...not much is it with such a high relative PE to the rest of the world
This is a subject that nobody seems to want to talk about. For my money some of the large blue chip Gentaiilers like MEL, GNE and CEN, (hold all), are trading on cash flow yield and are bond proxies and that's fine. Elsewhere many parts of the market with very modest growth are trading on PE's in the 30's and late 20's and are overpriced in my opinion. I would include in there many infrastructure and other companies with a well defined moat like POA, AIA, FPH and so on that really are trading at extremely stretched multiples.
I stay away from companies on the NZX that are overpriced for their growth. I will be exercising a very large position in Barrmundi warrants later this month because I believe the Australian market is fundamentally much better value than the NZX.
Ecclesiastes 11:2: “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”
Ben Graham - In the short run the market is a voting machine but in the long run the market is a weighing machine
This is a subject that nobody seems to want to talk about. For my money some of the large blue chip Gentaiilers like MEL, GNE and CEN, (hold all), are trading on cash flow yield and are bond proxies and that's fine. Elsewhere many parts of the market with very modest growth are trading on PE's in the 30's and late 20's and are overpriced in my opinion. I would include in there many infrastructure and other companies with a well defined moat like POA, AIA, FPH and so on that really are trading at extremely stretched multiples.
I stay away from companies on the NZX that are overpriced for their growth. I will be exercising a very large position in Barrmundi warrants later this month because I believe the Australian market is fundamentally much better value than the NZX.
we seem to be in agreement again about valuations of gentailers being fair if based on cashflows not pe
This is a subject that nobody seems to want to talk about. For my money some of the large blue chip Gentaiilers like MEL, GNE and CEN, (hold all), are trading on cash flow yield and are bond proxies and that's fine. Elsewhere many parts of the market with very modest growth are trading on PE's in the 30's and late 20's and are overpriced in my opinion. I would include in there many infrastructure and other companies with a well defined moat like POA, AIA, FPH and so on that really are trading at extremely stretched multiples.
I stay away from companies on the NZX that are overpriced for their growth. I will be exercising a very large position in Barrmundi warrants later this month because I believe the Australian market is fundamentally much better value than the NZX.
Yes agreed, I wonder why the NZX is so stretched compared to the other markets which are suffering from the same issues of lower returns on fixed income etc, after all this is a global issue.
Not that I wish to coattail the Beagle but how does one buy warrants on the ASX or even NZX for that matter?
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Originally Posted by SailorRob
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