Shares – Expensive but not Avoidable

Shares - Expensive but not Avoidable

Although share prices have fallen worldwide as a result of the pandemic, the market looks favourable – but it is not. This is because, after analysts have converted the slump in economic activity into their earnings estimates, the stock market is even more expensive than before. The price-earnings ratio is over 25 in the USA and 19 in Europe.

Due to the current interest rate level and lack of alternatives, there is no way around shares. Accordingly, shareholders have to accept certain risks. Volatility must also be tolerated to a certain extent.

If these expectations are not met, for example because there is a second wave of Covid-19 infections, it is quite possible that downward corrections will occur again. If you ask an investment strategist, he will take a bottom-up approach in this environment. It is also important to look closely at the companies in which investments are made.

As an example, Lazard AM carries out a fundamental valuation of companies before each investment. The ratio of the market price is observed. Accordingly, it is decided whether the valuation of a company is justified in terms of its earnings potential.

If too much quality is priced in, there is again no chance and alternatives with better chances must be sought. Investors will have to live with higher valuations on the stock market in the future, because the money printing by the central banks and the gigantic fiscal programs will further support this development. According to the investment expert Ewert, there is no way around shares in view of the current interest rate level and lack of alternatives.  

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