This is an original press statement released in August 2015.
USA stock overvalued, Unbalanced WACC.
Subject: Finiconsult has finished her calculations of the risk premium 2015 on shares. The usual comparison has been made between the theoretical discount rate on shares and the latest actual price/earnings (PE) ratios. The results indicate that US shares are overvaluated compared to European markets. On closer analysis, due to very low interest rates, the theoretical discount rates look unbalanced. Here follows a survey of that comparison.
The theoretical foundation of that comparison is based on the Capital Asset Pricing Model (CAPM) theory. That theory states that the correct discount rate in share valuation is the sum of a risk free interest rate + a risk premium. Column 1 contains the most recent risk premiums, based on the longest possible period (since 1900) as an average of all calculation methods. Column 2 contains the risk free long term interest rate for government bonds end 2014. Column 3 contains the sum of both and column 4 the reciprocal, a Capitalized Discount rate. Column 5 represents PE-ratio's (not weighted) based on 2005 net company profits in each major local index. In the last column 6 the difference between this PE-ratio minus that Capitalized Discount rate is shown. A positive difference hints to undervalutation, a negative such as in the USA, hints that markets are overvalued. In 2006, just before the credit crisis and basically the same model, all markets appeared overvalued as shown here. Actually this is only the case for the USA. However, on closer analysis, attention should be paid to the composition of the discount rates. The credit crisis resulted of course in lower risk premiums. It took until 2005 before risk premiums reached again more or less the same level as in 2006. The risk free rates at the contrary are still mostly about 50% of their 2006 level. So the only reason why the discount rates not yet regained the dangerous 2006 pre-crisis level, is central bank policy. There is no doubt that central banks in the longer run will end shooting with their interest bazooka's. The discount rates must therefore rise substantially. Column 6 could then easily turn negative all over and a new crisis is born.
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