This Week's Focus 13 of April to 17 of April 2015

This Week's Focus 13 of April to 17 of April 2015


Is the stock market overvalued?
After the sharp rise in European stock markets YTD, it is reasonable to ask whether the bag is expensive so you should analyze various parameters. Obviously, the current valuations are based, but also the levels of corporate earnings growth that will occur in the coming years. The PER (Price / Earnings) ratio we measured how often the price of a stock or index includes the profit of a company. It is also a measure of payout and indicates how many years would need to recover our investment. Therefore, the higher the ratio, the core is more expensive.

The following table shows earnings ratios of the major stock indexes today, expected for this year and also for the next.

As the table shows, most European indices and Wall Street is now moving in a range between 18x - 20x, when their average are lower (approximately 16x). That is, the valuations are expensive by historical standards. However, it is also seen as the PER estimated for 2015 and 2016 are much lower than at present. That can happen basically in two ways.
· Increased corporate profits.
· Falling prices indices.

Taking constant prices, according to Reuters estimates, corporate profits of companies in the IBEX 35 should be increased by + 15% in 2015 and by 17% in 2016 to justify these levels.

And at sector level?
In terms of sectors within the Stoxx600, the trend remains the same. All sectors maintain an EV / EBITDA (Company Value / EBITDA) above their historical averages. However, less overvalued sectors or that could represent greater opportunities to valuation level would be utilities (utilities), energy and financial sectors.

In the S&P500 valuations they are not as demanding, but thinking about the next corporate earnings, the enormous strength of the dollar (USD) will represent a public hándicap.Servicios, telecommunications, energy, financial, basic materials and industrial keep valuations in terms of (EV / EBITDA) in line with its historical average, while consumer discretionary, consumer discretionary and health have more demanding valuations.

Is there still upside potential in the stock market?

In favor:
· Capital flows continue to flock to European equities.
· Accommodative policy of the European Central Bank.
· Economic recovery phase.
· European companies favored by the depreciation of the Euro against most currencies.
· Increased consumption levels.
· Few investment alternatives with certain potential returns, such as bonds.

Against it:
· Demanding Ratings
· Geopolitical uncertainty (Greece, Ukraine and general elections in the UK and Spain).
· Expectations of monetary normalization by the Fed.
· Some sectors heavily overbought as health or consumer cyclicals.

However, in the table below we see how many years of bull markets, levels of + 20% is exceeded in several indexes. Clearly, this rate increases can hardly continue, but it is clear that there is a margin of appreciation in historical terms.

It has also drawn our attention to the parallels between the current year and 2005. The DAX30, CAC40 and EUROSTOXX50 rise above + 20%, while the IBEX 35 falls behind and the S & P 500 remains flat. At that time, we were two bulls and the next two years so were. Now we come to a stretch dominated by increases in the last three years and in full QE in the old continent.

In short, by flows, by increments of benefits and historical similarity, there is potential for further gains, even if go public we must consider that we are in the midst of a mature bull market and that the market is based largely artificially by central banks.