Market Absolute Performance Analysis

Is a particular market overvalued? Should you be switching more to cash or other markets?

A market is comprised of individual companies. Yet when deciding how much to invest in a country, fund managers often rely on macro data – economic growth, interest rates, etc. We believe that the best way to make market decisions is to treat a market as an aggregation of individual companies, and use bottom-up company data to arrive at the decision.

Our research focuses on aggregating bottom-up data of individual companies to determine the valuation of the entire market and where the fundamentals of the market are heading.

We use as many as five indicators – Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield – to determine whether markets are undervalued or overvalued. As each indicator may give a different signal, we have our proprietary Composite Valuation Indicator, which uses the best combination of the five indicators, so that you can have a final conclusion on the valuation of the market.

The following analysis was done on the S&P 500 Index stocks on 12th October 2017.

Slightly overvalued based on Price to Earnings, Price to Book Ratios and Dividend Yield.

 

 

 

 

Extremely overvalued based on Price to Sales and Price to Cash Flow Ratios.

 

 

 

Putting it all together…

Since the different indicators may give different signals as to how overvalued the US market is, we use the Composite Valuation indicator, which is derived from the best combination of the five indicators, and gives the final conclusion on the valuation of the market. Based on the Composite Valuation Indicator, the S&P 500 Index is overvalued but not in bubble territory.

We do not only look at the current valuation of the market but also need to see where the fundamentals of the market are heading (see highlighted circle.) The fundamentals refer to earnings, sales, cash flows, book value and dividends and are aggregated on a bottom-up basis based on available analyst estimates.

 

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We also compare the markets with the world market to give you an indication of whether a particular market is likely to under or outperform world markets.¬†Read more…

 

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