Evidence of Falling Equity Value


Yesterday was the day.  October 29, 1929 saw the beginning of the worst crash in Wall Street history. 

Will it start again?

Cross your fingers.

We can see rising equity risk by analyzing the Autumn 2017 “Keppler Asset Management Good Value Developed Market Review”.

The table below compares values of the Developed Market Portfolios as of the end of September 2017.

This comparison is based on selected variables (current numbers for book value, 12-month trailing numbers for the other variables — no forecasts).

keppler

Our latest Purposeful investing Course (Pi) update, compared this value chart with the value charts for the past year to highlight the steady rise in the Price to Book cost of even the best value equity markets.

Here are the results of the good value developed markets:

Quarter                Price to Book   PE Ratio  Dividend Yield

Autumn 2017              1.54              17.8                 3.17%

Summer 2017             1.47              19.0                 3.31%

Spring 2017                1.44               18.0                3.27%

Winter 2016               1.39               18.0                3.15%

Though the Price to Book has risen, the PE ratio has fallen and dividend yield has also dropped just a bit.  This means that companies have increased profitability and that payout ratios have increased.

But investors are paying more to get the results.

Shares, even in these best value markets, are becoming more expensive.

Another chart (below) shows the entire real-time forecasting history of Keppler Asset Management Inc. for the KAM Equally Weighted World Index, starting at the end of 1993.

keppler

Keppler’s projections are made based on relationships between price and value over the previous fifteen years moving forward in monthly increments and thus adjusting steadily to an ever-changing norm.

The chart includes two remarkable episodes: the five-year period (1997-2001) during which the KAM Equally Weighted World Index stayed above the upper forecast band, and the period starting in October 2008, when it fell below the lower forecast band, where it stayed through April 2014 (5 years and 7 months).

Since then, the Index (red line) has fallen slightly below the lower forecast band again twice last year.

In the past, index levels below or slightly above the lower forecast band turned out to be attractive entry points for long-term investors.

These implicit three-to-five-year projections indicate that the KAM Equally Weighted World Index is expected to rise at a rate that corresponds to a compound annual total return estimate of 3.9 % in local currencies — down from 5.5 % last quarter.

The upper-band estimate implies a compound annual total return of 8.8 % (down from 10.4 % three months ago), while the lower-band estimate of has turned negative in the second quarter for the first time since March 2001.  This indicates a compound annual total return of -1.7 % (down from -0.2 % three months ago).

The Keppler Total Total Projected Returns graph supports the idea that the higher the Price-to-Book rises, the lower the projected return.  Keppler’s projected return has been falling steadily for more that a year as the review below shows.

Projected

Autumn 2017    3.9%                                      8.8%                                   -1.7%

Summer 2017   5.5%                                     10.4%                                   -0.2%

Spring 2017      6.0%                                     10.9%                                    +0.2%

Winter 2016      7.7% down from 9.2%     12.7% down from 14.3%    1.9% down from 3.3%

These indicators suggest a slowing market that could be fueled by a sudden catastrophic drop (my opinion).

This is the first time in 16 years that Keppler’s projections suggest that we could experience a negative return in world stock markets over the next four years.

But overall, holding a weighted portfolio of good value developed shares still offers better opportunity than cash or bonds.

Based on this logic, the current projection is not particularly conducive making a major commitment to equities.

This makes it especially important to add protective positions in your investments and to doubly focus equity investments in good value markets.

Gary


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