How to value stock markets

When assessing value across markets, we need to set a level playing field, says the writer, and one way to do this is to assess if each market is more expensive or cheaper than it has been historically. But investors should always be mindful that pas
When assessing value across markets, we need to set a level playing field, says the writer, and one way to do this is to assess if each market is more expensive or cheaper than it has been historically. But investors should always be mindful that past performance and historic market patterns are not a reliable guide to the future.PHOTO: AGENCE FRANCE-PRESSE

Different measures have their pros and cons, so a rounded approach is most likely to bear fruit

When considering equity valuations, there are many different measures that investors can turn to. Each tells a different story. They all have their benefits and shortcomings, so a rounded approach that takes into account their often-conflicting messages is the most likely to bear fruit.

A common valuation measure is the forward price-to-earnings multiple or forward P/E. We divide a stock market's value or price by the aggregate earnings per share of all the companies over the next 12 months. A low number represents better value.

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A version of this article appeared in the print edition of The Sunday Times on May 20, 2018, with the headline 'How to value stock markets'. Print Edition | Subscribe