Page 45 - Phonebox Magazine August 2007

Finance Matters
brought to you by Advison Independent Financial Advisers
Is the stockmarket overvalued?
Anybody reading this hoping for a definitive answer to the above is in for a disappointment. As any seasoned market observer will tell you, knowing where the market is – in other words is it about to fall, rise or stagnate somewhere in between – is the Holy Grail of investment. Many profess to know but at any given time you will find so called ‘experts’ predicting all three of the above scenarios, often in equal measure.
The underlying problem is the almost infinite factors that can affect the market, allied with trying to establish what the true value of a share is. There are many different ways to work out whether a share is good value or not. One thing is for certain, you cannot simply look at the price of the share. At present many are predicting a poor time ahead for equities due to the level of the FTSE 100. However, this is far too simplistic.
The height of the FTSE 100 was on the last trading day of the previous millennium, 30th December 1999, when the index closed at 6,930. With it standing around 6,600 currently it would appear to be heading back towards the all time high, having more than doubled over the last four years. However, this does not mean shares are getting over valued.
The value of a company is in the profits it is able to generate. The level of profits earned by the FTSE 100 companies now is far greater than at the end of 1999. One of the most common ways of
valuing shares is the Price Earnings Ratio (known as the P/E ratio). This provides a figure which equates to the number of years you would need to hold the share at the present level of earnings, to get your money back. Therefore, the lower the figure, the better.
Currently the FTSE 100 stands at a P/E Ratio of just over 12*. This on its own will mean very little to most investors but when you look at it historically it can be very illuminating. For instance, the P/E Ratio when the FTSE 100 was at its all time high was over 31* which suggests that from this method of valuing shares they are 2 1/2 times better value than they were seven years ago.
This is, of course, only one way of valuing shares and we would reiterate the point that there are always many different views. What it does demonstrate though, is that those who suggest the market is getting too high, purely due to the level of the index, are taking too narrow a viewpoint and, in fact, shares may be better value than they have been for many years.
Advison has a wealth of experience in helping clients with different investment strategies and trying to ensure that a well constructed portfolio provides the diversity required. We are also able to review your investments so that they remain in line with your personal circumstances and objectives.
*P/E Ratio figures supplied by Invesco Perpetual
Unlike many IFAs, Advison not only provides the initial advice you require but also produces regular personalised reviews of your Investments, Pensions and Protection Policies, enabling us to ensure the assets you hold are still relevant to your circumstances. We would be pleased to discuss your specific situation and plan the most appropriate course of action for you. For full details about Advison please see our advertisement below.
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Advison is a small, friendly and reliable firm specialising in Investments, Retirement Planning and IHT Mitigation.
We offer a return to the traditional values only a smaller company can offer, a service we find
is appreciated by the more discerning client. We are happy to see you in the comfort of your own home or at our peaceful and relaxed country offices, which have plenty of free parking.
All staff at Advison are either AFPC or FPC qualified.
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Phonebox Magazine 45
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