History lessons

A 12 per cent fall in the FTSE 100 index in 10 trading days has made UK equities look as cheap as in 2008, on a range of valuation measures.

Alan Miller, chief investment officer of SCM Private, this week noted that FTSE shares now traded on a prospective price/earnings (p/e) ratio of less than 9 and gave a dividend yield of 4.2 per cent – making them 25 per cent cheaper than six months ago, and historically undervalued against 10-year gilts, which yield 2.7 per cent.

This ratio of bond to equity yields, and the ratio of share prices to net assets – known as “price to book” – make equities as attractive as at any time in the past 20 years, bar the financial crisis, said Mick Gilligan of Killik & Co.

Tim Cockerill, head of research at Ashcourt Rowan, agreed. “On all these counts, now should be a good time to invest,” he said. However, he warned that “volatility still lies ahead and perhaps for some months”.

Brian Dennehy said volatility could lead to further falls if longer-term history was a guide. He pointed out that UK shares were not historically cheap until they yielded 5 per cent. “That would require a further 26 per cent fall – 3,900 on FTSE 100 index,” he said. Even the Shiller p/e ratio, which uses average earnings over the past decade, suggests share prices are too high. “In the US, it stands at about 20 versus the average of 16.4. Just to get to the average, the US stock market would have to fall nigh on 20 per cent from here.”