FNArena’s Weekly Insights – October 7 2024
In this week’s Weekly Insights:
-Market Reflects Risk & Opportunities
-All-Weather Model Portfolio
By Rudi Filapek-Vandyck, Editor
Market Reflects Risk & Opportunities
It is easy, probably too easy, to be deterred by what looks like richly priced asset prices, but if the years past have shown one key message for investors, it is that present ‘valuation’ is only one aspect of the investment proposition.
It is much more difficult to understand the broader context in the background and why a valuation that looks beyond ‘normal’ can still be an attractive investment. I think this is one reason as to why the adage of bull markets climbing a wall of worry equally applies today.
Markets are forward looking. All investors understand the basic principle, but not so much when forward-looking translates into above-average valuation multiples in anticipation of better times ahead.
The last time we were all confronted with seemingly eye-watering PE multiples happened after covid temporarily closed down societies.
Those voices warning about an impending market crash based on historically outsized PE multiples have long gone silent as they ignored the one key reason why valuations at that time had to be well-above the long-term average: the subsequent recovery in earnings and cash flows would automatically pull back multiples to more moderate levels, and that’s exactly what happened in 2021.
It is true large parts of highly-valued equities experienced a tough time throughout most of 2022, but that was a consequence of bond markets resetting from exceptionally low yields, with follow-on impact on equity multiples, irrespective of where those multiples were at.
