This is an original press statement released in May 2006. Subject: Further increases in stock prices require strong valuation expectations.
Finiconsult B.V. has finished her calculations of the risk premium 2006 on shares in the countries where the company is active. The results indicate these premiums have not substantially changed compared to 2005. Combined with increasing interest rates however, discount rates have increased. The usual comparison has been made between the discount rate on shares or its reciprocal, the capitalisation factor, and the latest average price/earnings (PE) ratios. The theoretical foundation of that comparison is based on the CAPM-theory stating that the correct discount rate to value shares is the sum of a risk free interest rate + the risk premium. Here follows a survey of that comparison.
However, before jumping to any conclusion, take into account at least the following obvious factors. The PE-factor in the seventh column is based upon 2005 net profit. By assuming a strong growth in net profits for 2006 and later on, these differences might disappear. An assumed average 10% growth in net profits 2006, means a decrease in the PE-ratio of also 10% and thus a large part of the difference. The seventh column contains an unweighted PE. Most weighting criteria give stronger weights to larger and more established companies with often a lower PE. By taking into account risk premiums based on a shorter period of time for example 10 year or less and not based on all the years since 1900, these differences will be diminished further. They might even change into negative differences in some countries. They will not disappear in most countries however.
Nevertheless, taking into account all these factors, you need very strong expectations as to further future profit growth and share premiums calculated on a short and recent time frame to maintain that actual valuations on the stock exchange are bound to increase.
For any question please Email. For contact details and company profile see: Profile. All information is based on sources deemed to be trustworthy. All forward looking statements are subject to all required qualifications. Not any responsibility is taken for any conclusion.
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