Thursday 26 July 2007

Are Shares over-valued or undervalued?

it is quite interesting in the markets at the moment, everything is very up in the air and lots of traders seem unsure about what will happen next.

I am off out for a few beers with some tonight so will ask for their insight.

Economists (the dismal scientists) as a whole have a bad reputation and a couple of articles this week show why. In effect they like to talk out of both sides of their mouth at the same time (what a kitsch phrase, US phrase! I picked it up last week when I had been 'reached out to telephonically' by a US executive).

Anyway, some of the argument goes around the FTSE 100 being significantly undervalued because the smaller FTSE 250 stocks and AIM markets have increased at a far higher rate and now trade at multiples of 20. The FTSE as an average trade around 12, so in theory they could catch the smaller stocks up and so have some room left to climb yet.

On the other hand say some, the credit crunch is set to bite on the major Private Equity take-overs, making them much harder too pull off as the cost of borrowing goes up. This means that the 'premium' built into the FTSE stocks because of the possibility of take-over should be removed, meaning the FTSE100 should fall.

So whoever is right, the economists as a whole win, with their diametrically opposed models!

My tuppence is that Private equity take-overs could well be replaced, in the form of the Barclay's story ND covered below, by Dubai and Chinese capital. Which means the Stock market is set fair until the credit crunch reaches the consumer at some point probably later this year, early next.


S said...

Economists should be born with only one hand to stop them saying 'on the other hand'

Anonymous said...

Just my humble opinion, but I would say all shares are very much too highly priced right now given the massive level of debt that in general is unsustainable.

pommygranate said...

Slicker - i largely own blue chips for the very simple reason that their PE's are a very healthy low-teens with divi yields of 4%+. this rooms plenty of room for underperformance should the credit cycle turn against them.

i would be very wary of small and mid-cap companies trading in the 20s - valuations solely propelled by private equity takeover rumours.

its a good point about Middle East and Chinese money but i don't think significant in the long term. this is because no govt would be able to withstand public pressure to 'protect' national FTSE 100 companies if too many of them succumbed to foreign buyers.

Old BE said...

I think the Chinese will be canny enough not to buy up the whole stock market at once - they won't want a backlash.

Talking about management-speak, a friend last night was telling me about a video conference he had arranged where the video link wasn't working. "A telephone call then" I suggested...

CityUnslicker said...

James - well they do always seem to be able to talk themselves out of any situation.

Shot - Well since I wrote this the markets have wiped out all the gains for the year!

CityUnslicker said...

Pommy - I think the UL is quite different to most other countires, i do not see the government getting involved in foreign take-overs. They left P&O and BAA alone recently and these are 'strategic' companies.

This though is great news, it will limit our diplomacy which means we should get involved in less wars and the shareholders will get rich!

You are right about the blue chips at the moment. Some small stocks can work out, I think the natural resources sector looks good at the moment.

CityUnslicker said...

Ed - yes, but they have to do something and won't want it all in US treasuries. They have a big mountain of cash to spend and UK assets are a solid bet and the pound is not affected by the carry trade; reducing the currency risk.

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