This is an original press statement released December 2017.
Subject: USA/UK stock most likely overvalued, Continental European stock markets undervalued. Finiconsult has finished her calculations of risk premiums 2017. The usual comparison has been made between the theoretical PE ratio and the latest actual price/earnings (PE) ratios in various countries. The results indicate that further rises in US/UK share prices cannot be rationally explained. US and UK stock markets are most likely overvaluated compared to continental European markets. Here follows a survey of that comparison.
The theoretical foundation of that comparison is based on the generally accepted Capital Asset Pricing Model (CAPM). That theory states that the correct discount rate in share valuation is the sum of a risk free interest rate + a risk premium.
In 2006, just before the credit crisis and using basically the same model, all markets appeared overvalued as shown here. Actually this is the case for the USA and UK. However, attention should be paid to the composition of these discount rates. The credit crisis resulted in lower risk premiums as well as lower interest rates. Now risk premiums reached again more or less the pre-crisis levels of 2006. Risk free rates at the contrary are still well below their 2006 levels due to central bank policy. Increased interest rates due to policy changes increases immediately the theoretical PE. This will increase the difference with actual PE when already in red territory. The long term change in actual PE is most likely insignificant but very erratic in the short run. Compared to last year, column 6 is less reassuring and could easily turn negative all over and a new crisis is born.
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