Macro Roundup, Feb 21
Should investors rely on the accepted 10%-11% benchmark figure for expected average stock returns? The answer is 'no'. To understand why, read my commentary in the latest issue of The Real Returns Report.
In What Ptolemy tells us about Germany and Greece (FT), Stephen King (HSBC's chief economist, not the first-rate horror writer) explains why the narrative of lazy, profligate Southern European nations is inadequate to explain the Eurozone's current predicament and instability.
In Bull run to be powered by low valuations (FT), Tim Bond of Odey Asset Management argues that equity valuations and attractive and have likely bottomed thanks to shifts in the supply and demand for stocks and lower expected macroeconomic volatility. I don't agree, but he does make one point that is among the most widely misunderstood in the finance when he writes that "contrary to popular wisdom, PE ratios are not driven by long term interest rates or inflation."
Investors weigh prospects for dividend catch-up (FT) is too short-term in its outlook, but it contains some interesting figures. For example, "S&P 500 companies are paying out just 30% of retained earnings through dividends, the lowest payout ratio since records began in 1871, according to analysis by Wells Fargo."
At the beginning of the year, I predicted that the S&P 500 would miss its 2012 EPS forecast and that earnings might even shrink year-on-year. Although the top-down estimate, which I referred to explicitly, has been revised upwards since then (from $98.88 to $99.98), the bottom-up estimate has started to come down (from $106.87 to $105.07). The latter revision is consistent with this observation from the FT: "US companies are more uncertain about the future than at any point since the financial crisis, with just one in five of the country’s biggest corporations making any predictions as they published fourth-quarter results." (US Corporates shy to offer guidance, Feb. 20). Indeed, the bottom-up estimate is an aggregate of analyst earnings estimates for each individual company.