The financial press makes for pretty depressing reading so far in 2008. We always caution our clients in taking too much notice of what the financial press is saying as they are in the business of selling newspapers, or more exactly selling advertising which is found in newspapers or on financial news service websites. Of course, doom and gloom sells. However there is no denying that the market is experiencing a great deal of turbulence at the current time.
In looking at what is going on in terms of taking a long term perspective, we like to look at the investment fundamentals. A particular fundamental we like to keep an eye on in assessing sharemarkets are price-earnings (P/E) ratios. This ratio is a measure of the price paid for a share relative to the income or profit earned by the company per share. A higher ratio means that investors are paying more for each dollar of income produced by the companies.
In today’s Australian newspaper, UBS chief strategist David Cassidy is quoted as commenting that the P/E ratio on world markets had fallen to less than 13 times earnings – the cheapest level in almost 18 years. Measurements of P/E ratios over the past 200 years place average levels at somewhere between a level of 14 & 15.
What this is saying is that there may have been some over-selling in markets and that taking a medium to long term view, share prices are good value at current levels.
The point of this discussion is not to encourage investors to jump into the market in a buying frenzy. Markets may well continue falling for a while yet. Rather, it is a reminder that markets are volatile and what could be a downward trending market today could quickly turn in to an upward trending market in the near future. Those who take risks at timing markets could easily fall in to the trap of selling at lows and buying at highs. A much better approach is a buy and hold for the longer term.