Market valuations: An interim high or bottomed out? It doesn’t matter!
Have stock markets fallen so low that it is worthwhile getting back in? Or is this just a brief interim high on the way even further down? “At this time, many clients are asking their advisors about re-entering or re-buying”, says Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. “Apart from the fact that well-advised clients have not even exited the market, the answer is: It almost doesn’t matter.”
Measured in terms of valuations, shares are currently fairly inexpensive. The average P/E ratio of the DAX index stands at between 13 and 14 at the moment, the long-term P/E ratio between 15 and 16. The difference is similar in the US, where the S&P 500 P/E ratio is at current levels of between 18 and 19 versus about 21 in a historical comparison. “These figures show that shares are currently valued quite moderately”, Gerlinger adds.
So, are these entry prices then? “As the past has shown, it has almost always been worthwhile to make long-term investments in equities irrespective of the timing of the investment”, says Gerlinger. “Thus, it is more attractive to enter the market now than at the times of record highs, when many investors bought shares anyway.” The real question, however, would be whether clients can afford not to get in. “Reviewing history is helpful again”, says Gerlinger. “Stock markets have always proven to be very robust in times of crises and upheavals. In the long run, investors have always enjoyed positive returns.”
The situation looks different, however, when clients are trying their hand at market timing. “The objective to always buy at lows and sell at the next highs has cost many investors enormous amounts of money”, Gerlinger points out. Even professional investors continue to fail to time the markets correctly. “By attempting to buy and sell at optimum times, investors frequently miss out on the best market days and are then spending a long time looking for a re-entry”, says Gerlinger.
While a long-term strategy should regularly be adapted in times of downward and expected upward movements, it should not be fundamentally called into question. “Advisors look closely at clients’ objectives and wishes, assessing their risk-bearing capacity, and will then establish a strategy jointly with their clients”, Gerlinger explains. “This strategy is then largely independent of the respective market situation and should be followed through.”
The grab for gold or other precious metals, frequently driven by fear, is not a very good idea either. “As the markets have proven over and over, gold is an asset class like many others”, says Gerlinger. “It is not interest-bearing, but in certain situations it achieves an increase in value.” Appropriate investments out of fear of a crisis would only make sense when anticipating an extreme collapse of the global economy or a complete escalation of any crises. Gold may certainly have its place in a long-term investment strategy, but its share should be determined right at the beginning and should then not be increased unnecessarily.
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