Investment Newsletter - November 2018

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Investment Newsletter November 2018

Looking back to the future At Equilibrium we know we can’t predict the future. However, we do think historic market behaviour can sometimes be useful when working out what might happen in the future.

Mike Deverell Investment Manager

Equilibrium Investment Management

For example, we have often written about some of the stockmarket indicators we look at to decide if we think equities look good value. One of the most useful is the market’s price/earnings (PE) ratio. This simply takes the total value of the companies on the market and divides it by their total profits (earnings). The higher the number, the more expensive the market, and a cheaper market will mean a lower number. This has historically been a decent indicator of potential future returns. This can be seen in Chart One, which shows the relationship between the PE ratio of the UK stockmarket and its returns. Each red dot represents a

different five-year period on the UK stockmarket. The horizontal axis shows what the PE was at the start of that period and the vertical axis shows what the returns were over the subsequent five years. There is a clear pattern from top left to bottom right. A period which starts with a low PE ratio tends to see much better returns than a period that starts with a high ratio. Of course, it is not a perfect indicator but the starting valuation is pretty important. Those of you who have been reading our newsletters for a while will know we have been banging on about this for years! I therefore thought it might be worth looking back at one of our past newsletters to see what we were saying back then. Five years ago the PE ratio of the UK market was around 14.5 times earnings which is roughly in line

Equilibrium Asset Management LLP (OC316532) and Equilibrium Investment Management LLP (OC390700) are authorised and regulated by the Financial Conduct Authority and are entered on the financial services register under references 452261 and 776977 respectively. Registered Offices: Brooke Court, Lower Meadow Road, Handforth Dean, Wilmslow, Cheshire SK9 3ND. Both companies are registered in England and Wales.


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Investment Newsletter - November 2018 by Equilibrium Financial Planning LLP - Issuu