With the stock markets in buoyant mood, the need to identify value is becoming ever great. Ben Whitmore of Jupiter Asset Management has conducted some analysis to identify just how expensive equities have become in certain regions. Interestingly he notes that the UK is trading on a ‘Graham & Dodd P/E ratio of 18.8x compared to the US’s ratio of 28.7x:
And while both the US and UK markets seem highly-valued, he identifies some sectors in the UK in which greater value could be present:
What we find especially interesting is that the UK is currently trading on a Graham & Dodd P/E ratio of 18.8x and the US market on a P/E ratio of 28.7x. These appear to be highly-valued markets right now – the US in particular has a P/E ratio well above the long-term average.
In the UK, the mining, banking, food retailing and energy sectors all appear particularly lowly-valued on a Graham & Dodd measure. From a portfolio construction standpoint, we do not want to have too much exposure in absolute terms to any one specific sector, and as such try to ensure we have a diversified set of positons with relatively low correlation. Therefore, while there are some lowly-valued companies to pick from in the UK, we don’t see an abundance of new names for us to consider at the moment. Currently there are only 74 companies within the FTSE 350 ex Investment Trusts Index that trade on a Graham & Dodd P/E ratio of less than 16x.
And for those looking for more details on the metric used to identify the above ratios:
In practice, the Graham & Dodd metric allows us to get an approximation of a company’s valuation across a business cycle and smooth out any inflated or deflated profits and earnings. This is achieved by looking at a company’s price-to-earnings (P/E) ratio, using the average earnings over the last 10 years.