Stock market valuations in bear market

Source AP
Stockmarket Despair- Source AP

It is dangerous to pick bottoms in bear markets but ahead of normal seasonal rallies in December and January some stock markets are now offering fair value. This assumes earnings declines next year. 

Economic and financial risks are recession in Europe and negative impact on earnings. Local and foreign sales of sovereign bonds are keeping European “Club Med” nation bond yields high and this raises the cost of long term borrowing. China’s credit implosion and impact on Europe and emerging markets remains serious.

Geopolitical risks are Iranian nuclear weapons crisis coming to a head and energy threats from Russia. Despite political turmoil regarding the  multi trillion US debt, the election cycle there could be a booster for Wall Street. A more buoyant US market would help European and Asian stocks. German and French elections  are likely to have a neutral impact. Italian bankers who watch the political situation in Italy closely contend that eventually Italian bonds could defy the pessimists and rally i.e. current high yields could dip. That bond market, however, is volatile and in short term yields could spike higher.

European bear market


  2011 high 2011 Aug low Rally from low Nov 25 levels Decline from 2011 high % Earnings yield% Dividend yield% 10 year bond yield%
Germany 7610 5000 6400 5380 -29 12.3 4.1 2.24
France 4200 2700 3400 2802 -33 10.6 4.7 3.67
Italy 23000 13032 16148 13616 -41 11.1 5.6 7.31
Spain 12234 7505 9400 7603 -38 13.0 9.3 6.60
Greece 710 259 310 259 -64 12.8 5.7 27.00
 FTSE 100 6112 4750 5800 5094 -17 10.0 3.7 2.26
S&P 500 1376 1080 1281 1150 -17 7.7 2.7 1.95
Nikkei 11374 8785 10900 8127 -29 7.3 2.6 1.03

Comments:  1) Japan is the only market that has fallen to new 2011 lows and is now offering similar returns to US. Relative to domestic bonds, value is good and if the yen falls ,a big bounce could take place. Japan, which is very depressed, could well be the market that  is the best placed although China is a bearish factor and the country vulnerable to an Iran induced oil price spike. Following such a big slide, potential investors will have to judge how much is discounted.

2) Italian and Greek markets are overvalued relative to their bonds. Spain is the exception. The Greek stock market is hovering around 2011 lows.

3) German, UK and to a lesser extent France and US stock markets are good value relative to bonds. UK, German and US bonds are especially overvalued.

4) But for China & Iran, Japan would get the vote for best performing market in 2012, but there are so many variables that it would be foolish to make a firm prediction.

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