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Friday, August 29, 2014

Burton Malkiel on Stock Valuations in the US and in Emerging Markets

Prof Burtom Malkiel author of the investment classic Random Walks Down Wall Street has a column in the WSJ on stock valuations

On the US
There is a disagreement about the sustainability of current lofty stock market valuations.
One camp argues that the market is dangerously overvalued. The so-called CAPE ratio—the price-earnings multiple for the market based on cyclically adjusted earnings averaged over the past 10 years—stands at over 25, well above its long-run average of about 15. Today's CAPE has been exceeded only during the market peaks of 1929 and early 2000 and 2007.....
Another group of forecasters are convinced that stocks are reasonably valued. The main competitors for stocks in individual and institutional portfolios are bonds. And yields on fixed-income securities are at all-time lows. ...
While continued low rates can justify high stock prices, the CAPE followers are correct as well. Long-run equity returns from today's price levels are likely to be considerably lower than their 10% long-run average.......
On Emerging Markets
All equity portfolios should include emerging markets. Emerging markets, accessible through broadly diversified, low-cost, emerging-market exchange traded funds, represent half of global economic activity. ....
Emerging equity markets also have far more attractive valuations. CAPEs for emerging markets at less than 15 are little more than half the levels in the U.S., and they stand at ratios close to their all-time lows. Just as CAPEs do reasonably well predicting long-run returns in the U.S., so they are also effective predictors in emerging markets,


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