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Dizzy heights - The US market is historically very expensive but pockets of value still exist

12/07/2013

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

In The nature of things, we argued recently that, should you currently be looking to asset allocate to the US in any way, you need to be very careful and targeted in your choice of stocks, funds and investment houses. That is because, while the value part of the US stockmarket may look extremely cheap, the wider US market is now very expensive.

Just in case you should not be inclined to take our word for it, however, The Value Perspective has dug out a couple of charts from Advisor Perspectives (no relation) that uses the so-called ‘P/E10’ ratio of price to – the 10-year average of inflation-adjusted – earnings to illustrate just how expensive the broad US S&P composite index is at present.

The first chart, below, shows the P/E10 ratio now at 23x, which means it features firmly among the top fifth of most expensive levels in more than 140 years. These range from 20.9x to a high of 44.2x, which was reached in December 1999 – the very top of the technology bubble. For the record, notes Advisor Perspectives, “The 1929 high of 32.6x comes in at a distant second”.

The next chart makes the point in a different way, ranking all the US market’s 1,590 available P/E10 ratios in a historical context. With the first percentile the most undervalued and the 100th percentile the most overvalued, today’s 23x valuation ranks in the 88th percentile. Again, by way of comparison, the 1929 high features in the 97th percentile while anything above that was part of the tech bubble.

To reverse our point from The nature of things, therefore, while the bad news is the broader US market currently looks very expensive, the good news is pockets of value do – as ever – still exist. Furthermore, there are so many listed US companies that, even if only a tenth or so of them are cheap, that still leaves a significant number from which to build a value-oriented portfolio.

Author

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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