Focus on Research

March 15, 2013 3:06 pm

Equity markets are ripe for investment

Fears of sequestration and the Eurozone crisis have been overplayed and equity markets are ripe for investment. This is the assessment of Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School, who sees stock markets worldwide as “a buy”.

In an interview for Knowledge@Wharton, Prof Siegel, a veteran scholar renowned for his bullish outlook, is optimistic about the US stock market. Citing corporate price to earnings ratios – a company’s share price relative to its annual profits per share – he sees “a world of difference” compared with 2000, the height of the dot com bubble.

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“The huge difference is that 12 years ago [shares] were selling at 30 times earnings. Now we’re selling at 15 times earnings,” he says, noting that US corporate profits and dividends are at all-time highs.

Prof Siegel’s prediction that the Dow Jones share index will rise by at least 10 per cent in 2013, perhaps even by 25 per cent, has been lent weight by the charge in global share prices in early March.

Prof Siegel’s enthusiasm for stocks extends to emerging markets where he sees “very reasonable” share prices in light of strong and sustained economic growth. He is optimistic for European stocks too, arguing that the region’s negligible growth and the Eurozone crisis have “mostly been factored into the market”. While cautious of continued risks, he sees value in shares of European exporters whose global competitiveness will rise if the Euro declines in value as he expects.

The Wharton professor’s outlook for the bond market, seen as a safe-haven for many investors, is however less rosy. “I describe [long-term bonds] as one of the most expensive insurance policies you can now buy, and I don’t think it’s worth the price.” He argues that long-terms bonds will prove “a huge drag” on investment portfolios as they may lose value as interest rates ultimately rise.

In the context of a recovering US economy, Prof Siegel goes on to advocate that now is an optimal time for those who have been waiting to buy a house and secure a low-interest mortgage to do so. “There is no question that the bottom has been reached...and I think the [upward] trend on home prices will continue quite strongly over the next year.”

http://knowledge.wharton.upenn.edu

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