Questioning FTSE price earnings ratio forecasts

OVER the last few weeks, investor uncertainty has driven a mass sell-off in equities, as market volatility has pushed investors to seek safe havens until the waters calm a little. But with prices being driven so low, is it time to pile back into UK equities?

Looking at price/earnings ratios seems to suggest that the FTSE 100 is, on average, priced cheaply compared to projected earnings. But according to Anthony Grech, head of research for IG Index, many make the mistake of looking at a P/E ratio in isolation without taking into consideration whether earnings have peaked or not. “At 5,350.58, the FTSE 100 is trading around 9.49 times current-year earnings of £564.07 per share, which appears attractive at face value,” says Grech. “However, the latest batch of economic data seems to suggest that global economic growth is losing momentum, which if true would suggest that we are close to the peak of the earnings cycle.”

According to Jamie Blake, sales account manager at London Capital Group, clients are beginning to return to the market: “In the wake of the recent sell off, we’re starting to see our clients act as bargain hunters and swarm into the market place to get their hands on the best deals. And yes, when looking at the P/E, you could be pessimistic and put off.”

Take for example HSBC, which has a current P/E of 12.3, falling to 9.3 if exprected earnings materialise. The share has been given a “strong buy” rating by 18 out of 33 brokers and is sitting at a 25 per cent discount to its 12 month high. However, in the current market conditions, investors are focusing on the macro fundamentals and possible problems in the future, rather than looking at a company’s financial statements to get an idea of where the share price is heading. According to Blake: “There’s always going to be that nagging fear in the back of their minds which may hold them back from adding it into their portfolio.”

“Many say that things look cheap today, but technically they were also cheap a week ago, and the week before that too,” says Michael van Dulken, research analyst from Accendo Markets. “A lot of bad news is now out in the open, but can we honestly say that there is no further risk of disappointment?” As long as current volatility continues, stock valuation is going to remain a tricky business. If the UK economic recovery continues to falter – recent anaemic growth figures show little sign of an upturn in this trend – and fears of European sovereign debt contagion continue, earnings estimates could still be a long way off the mark. If this triggers more selling off in the equities market, investors should perhaps consider a move to mining stocks linked to safe haven metals as some of the few that have bucked the trend. Alternatively, they could just buy those safe haven metals themselves.