Checking the Math on Global Equity Prices, China Growth, the French Economy, and Gold
In 300 BCE, Euclid developed the concept of mathematical “proofs” using deductive reasoning to uncover truth. Several thousand years later, in his search for economic truth, Grant Williams, portfolio manager and strategy adviser for Singapore-based Vulpes Investment Management, laid out four mathematical “proofs” at the 66th CFA Institute Annual Conference that address the disconnects and incongruities between financial markets and the global economy.
Problem #1: If we have a global economy that is barely growing, why are major equity markets hitting all-time highs?
With the global economy limping along at 1.4% growth, Williams identified the disconnects between the underlying fundamentals and equity prices in major countries. Manufacturing and trade indicators (in the United States, the eurozone, United Kingdom, Japan, and China) are stalling, including the Purchasing Managers’ Index (PMI), the Baltic Dry Index, and the U.S. Macro Index. About 25% of companies in the S&P 500 missed earnings forecasts in the first quarter of 2013; 45% missed in Europe. But even more disturbingly, 45% of companies in the United States and 66% in Europe missed their revenue targets. Williams also cautioned the audience about valuation levels. Although, admittedly, we’re not back up to dot com–era levels, it would still require a 30% drop in the current Shiller P/E ratio of 24x earnings to get back to the ratio’s 130-year historical average of 16x. “Also, real bull markets start at about 5–7x earnings,” Williams noted.
