Are stocks expensive? It’s time to look under the bonnet

“At times like this, one can read articles on how expensive the stock market is. Even comparisons with 1929 and 2007 are made which, however, seems a bit farfetched,” writes regional director at Sparinvest Karsten Løngaard that were invited to contribute with a comment to the Luxembourg based financial magazine AGEFI.
Sparinvest’s best “guess” is that stocks over the course of the next 10 years will return 6-7% annually – which is not bad considering low and stable inflation and bearing in mind what risk return characteristics other asset classes put on the table. Hence, if investors want to achieve better returns than suggested above, then like when buying a car, investors should look under the bonnet – which arguably is a healthy thing to do in the long run.

Value less exposed to interest rates
As investors, we all know that a low entry price is a good starting point for an investment. Therefore buying value stocks, i.e. the cheapest stocks relative to their earnings or book value has turned out to be an outperforming strategy for long-term investors. This is on the contrary to more pricy growth stocks, which by their very nature have a higher cash flow duration than value stocks. This is seen clearly when graphing “value stock minus growth stock’s return” against the 10 years US treasury yield.

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