Fifteen Great Papers on Equity Market Valuation
Never mind whether we are in possession of the punch bowl or whether it has been taken away... is it the case that as long as punch exists, equities will go higher? The 10-year CAPE ratio on the S&P 500 is now over 34, the highest reading since the dot-com bubble of 1999-2000.
Here we've listed 15 papers about equity valuation. You can decide for yourself how much extra time remains in this rally, but keep In mind, although Goldilocks may have found herself in an environment that was 'just right,' she eventually wakes from her slumber and is discovered by the bears.
CAPE Fear: Why CAPE Naysayers Are Wrong (Research Affiliates, Jan 2018)
Should he currently high US CAPE ratio merit fear, or should one fear the CAPE ratio itself because of its lack of predictive capacity in indicating market highs and lows?
Equity Valuation: Science, Art, or Craft? (CFA Institute Research Foundation)
The authors interview portfolio managers, directors of research, and CIOs in order to investigate how analysts formulate (overweight/underweight) beliefs that differ from the prevailing consensus.
How ESG Affects Equity Valuation, Risk, and Performance (MSCI, 2017)
Bearing in mind the distinction between correlation and causality, the financial performance of companies with strong ESG characteristics is examined.
Market Timing - Sin a Little: The Valuation Timing Puzzle (Cliff Asness, JoIM)
Successfully timing the market is extremely difficult, especially when compared to recent passive buy-and-hold approaches, so is it a source of added value? The authors propose a potential enhancement to value timing strategies.
Value: A Practitioner's Guide (S&P Dow Jones Indices)
Value stocks often trade at a discount relative to their peers but have upside potential. This paper by S&P Dow Jones acts as a helpful guide to value investing for investors.
The Coming Bear Market (Robert Shiller, Sept 2017)
Conditions within the US stock market at present look similar to previous market peaks. Although not necessarily a foreboding signal implying an imminent bear market, it is perhaps cause for caution.
The evidence for and against a looming correction (Fidelity Intl, Dec 2017)
(For compliance reasons, this paper is only accessible in the UK and Europe)
Is the present 8-year bull market running out of runway? Stock and bond market valuations are both high, as are economic indicators, but central banks are ending QE programs. How much extra time do we have left on the clock?
Investing in a World of Overpriced Assets (Jeremy Grantham, GMO Dec 2017)
Jeremy Grantham ponders how he would manage money if the failure to meet a 10-year return target would result in death. He concludes that Emerging Markets are the safest, long-term, bet.
FAANG SCHMAANG: Don’t Blame the Over-valuation of the S&P Solely on Tech (GMO)
FAANG stocks are up 36% on average year to date through September 2017. This GMO paper delves into questions about the valuation of the S&P 500 index, how it is composed, and how other markets compare.
Equity Market Valuation: Multiple choice (UBS, Sept 2017)
The PE ratio is ubiquitous, but do investors overweight its importance in evaluating companies? What is the information value of the PE ratio to investors when it comes to predicting forward index returns?
A Focus on Valuation Within Markets Reveals Opportunities (PineBridge, Oct 2017)
There is a tendency for investors to reward growth, especially in Indian and US markets, where a high degree of innovation exists. Given the current environment, could value opportunities still exist in small caps and EM stocks?
Goldilocks and the valuation bears (BlackRock, Aug 2017)
Will this 'Goldilocks' recovery stick around, or are equity multiples overdue for an adjustment to historical (or 'fair value') levels?
Reducing Sequence Risk Using Trend Following and the CAPE Ratio (FAJ, 2017)
The authors show that trend-following strategies can be utilised in order to greatly reduce sequence risk (the risk of poorly timed investment outcomes), a critical risk for those in the later stages of a DC pension scheme.
Deep Value (AQR Capital Management, 2017)
The authors of this paper explore aspects of value strategies and describe 'deep value' as a time during which a wide valuation spread exists between cheap and expensive securities.
Bracing Yourself for a Possible Near-Term Melt-Up (Jeremy Grantham, Jan 2018)
Jeremy Grantham examines all of the great bubbles of the past, searching for useful guides to the future, and making comparisons to the present day.