It is understandable that many investors may be feeling a little uneasy at present. Markets continue to be volatile, up strongly one month and down the next. The big issues we tend to be focusing on are European debt, austerity measures in Europe to reign in the debt, the sluggish US employment numbers and worries about a double dip, and Chinese government efforts to slow down growth to help manage possible asset price bubbles. Just writing this causes me to want to take a tablet and have a lie down.
One set of data that does not seem to be getting the same airtime from the financial media are earnings being generated by local and international companies.The recent US reporting season has been strong and in part helped global markets along through July and early August. In the end it is the earnings generated by companies that provide a return to long term investors and should be a key consideration when investing.
A report in today’s Australian Financial Review written by David Bassanese – “US growth will avert earnings slump” – provides some interesting data about the earnings reported in the US.Bassanese outlines that price to forward 12 month earnings (i.e. forecast earnings) for the US S&P 500 is sitting around 12.3, 23% below its 10 year average of 16.Longer timeframes suggest the average ratio is more like 15 times forward earnings.Either way this simple statistic suggests that US share prices are good value at present levels.This might well be because share prices are factoring in the chances of future economic head winds and is not in itself a signal to buy, buy, buy, but it does suggest that if you have a long term window, buying assets now could provide you with access to a well priced earnings stream into the future – what should be the key focus of a long term investor.
Unfortunately price to earnings ratio do not provide an accurate buying guide.The ratio could fall further and company earnings could falter for instance if the US economy falls into another recession.However it provides a glimmer of hope in what seems to be a doom and gloom story in the media.
So is now the time to buy or sell?
As always, our firm’s approach is not to try to time markets but rather structure portfolios for the future, keeping enough aside in cash and fixed interest to at least cover the next 7 years of income requirements and then spread the remaining assets across a diversified portfolio of Australian and international shares including listed property.Those who, after taking their individual needs into consideration, have the capacity to invest regularly over time, now is still a good time to be making these investments.
For more information about our approach please refer to our Building Portfolios page.
