Market valuations

The market continued its bullish climb last week to another high for the year as it closed at 6,429.99, capping the week with a net gain of 116.63 or 1.85 percent.

This happened as share prices on Wall Street extended their gains during the week with the Dow Jones Industrial Average (DJIA) and S&P 500 rising to record levels on reports of improving consumer outlook and positive feelings by US investors on the stance of the US Federal Reserve on the quantitative easing program.

In news about her second public appearance since assuming the post as Fed chief, Janet Yellen was said to have “strongly indicated that the Fed is by no means stuck to a firm taper” if it endangers more than supports the continued growth of the US economy.

On consumer confidence, data showed it improved further in February compared to the January level, despite findings that the “gross domestic product expanded at a slower pace than estimated in the fourth quarter.”

US investors blame the reported economic slowdown to the cold weather affecting the country than being systemic, arising from the fragility of the US economy.

Stock values

Along with this renewed bullishness and momentum of stock advances, it may be interesting to find out how asset valuations are presently doing.

On Wall Street, the market buzz on the subject is reportedly described—in layman’s language—as “aren’t excessive.”  As verified from market data, this refers to the observed valuations on S&P 500 stocks that prevailed during the market bull run of 2000 and 2007.

At the market’s peak in March 2000, the price earnings multiples or P/E ratio (PER) of S&P 500 stocks were estimated at 26.4 times earnings per share.  In 2007, stocks were calculated to be trading at 17.7 times earnings per share when it was at the market’s peak in October.

At this point of the market in 2007, it was felt that it still had a lot of steam to head higher considering the level of volume and magnitude of business transactions.  But as we all know now, the market tanked not long after, with the outbreak of the subprime problem in the US property sector.

In contrast, S&P 500 stocks are now estimated to be trading at about 14.5 times earnings per share—prompting market insiders to say “we’re still far from the edge of a cliff.”

On emerging markets, commentaries say stock valuations have turned better following the massive fund outflows late last year and into this year.

The quantitative easing program of the US effectively provided low-cost money.  A good amount of which found their way into developing economies that badly needed low-cost financing but are not ready to meet short payment terms, especially the high interest rates.

The withdrawal of the said asset class triggered “brutal sell-offs” that resulted in the “sharp fall in the value of currencies like the Argentine peso, Turkish lira, South African rand and Brazilian real.”

Over the weekend, a leading foreign fund expressed interest in investing in Indonesia while another foreign fund  announced its desire to revisit Thailand.  In their market advisories, they claim these market centers seem to offer “solid values.”

Bottom line spin

The three peaks and two troughs of last year would be good milestones to show us how much our present stock valuations are, so far.

Using the published data of the bourse, the market PER for the PSEi and All-Shares index on the first week of January 2013 were estimated at 18.68 times and 18.83 times, respectively.  Foreign transactions amounted to about 49 percent of total transactions for the period.

The figures went up to hit the market peak in May 2013 of 23.04 times for the PSEi and 23.11 times for the All-Shares index, with foreign transactions rising to 52 percent.

At the market’s first bottom, which occurred in June 2013, market PER for PSEi fell to 19.02 times while that of the All-Shares index fell to 18.16 times.  Foreign business also fell to 51 percent.

In July, at the market’s second peak for the year, market PER for both PSEi and the All-Shares index inched back to the 19 times level.  The same happened at the market’s third peak for the year in September when foreign transactions accounted for 51 percent of total market business.

Market PER suffered badly when the market tanked in October for the second time.  Market PER for the PSEi fell back to 17.32 times with the All-Shares index falling to 17.74 times.  This happened as foreign transactions fell to 50 percent.

At its second fall in December, market PER for the PSEi and All-Shares index again dropped to 17.61 times and 17.89 times, respectively, even if foreign transactions were at 51 percent.

In January this year, market PER started to go up along with the percentage of foreign business transaction which ballooned to 60 percent.

As of last week, market PER was estimated at 18.86 times for the PSEi and 18.60 times for the All-Shares index. Foreign transactions slightly fell to 58.0 percent.

With past data as a backdrop of the present, it looks like current valuations are becoming frothy.

(The writer is a licensed stockbroker of Eagle Equities Inc. He may be reached through [email protected] , [email protected] or www.kapitaltek.com)