Saturday, 6 November 2010
Happy birthday to me and the FTSE 100 cyclically adjusted PE ratio – November 2010
22% Bonds (Cash which is mainly my emergency fund, Index Linked Gilts, Index Linked Savings Certificates)
21% Australian Equities (ASX 200)
21% United Kingdom Equities (FTSE All Share)
15% International Equities (40% US, 40% EU, 20% Japan)
5% Emerging Markets Equities (MSCI Emerging Market TRN Index)
10% Property (Listed Euro Property and UK Commercial)
5% Commodities (Gold)
In line with my mechanical investing strategy to remove all emotion from investing my yearly de-risking is also simple and mechanical. I’m simply removing 1% from high risk assets (0.5% from Australia Equities and 0.5% from UK Equities) to give target nominal strategic asset allocations of 20.5% respectively. I’m then adding that 1% to Bonds (Index Linked Gilts or Index Linked Savings Certificates which unfortunately aren’t currently available). Of course I will continue to be overweight or underweight against these equity allocations depending on the value of the relevant cyclically adjusted PE ratios. This is in line with my mechanical tactical asset allocation strategy.
Speaking of cyclically adjusted PE ratios let’s take a look at the latest FTSE 100 cyclically adjusted PE ratio (CAPE or PE10).
The first chart shows that with the nominal FTSE 100 price moving from 5592.9 (01 October) to 5694.6 (01 November), an increase of 1.8%, over the month the PE10 ratio has also risen from 13.9 to 14.1. This is still well below the FTSE 100 PE10 20 Percentile for this dataset of 16.9 while the 80 Percentile is 23.7. The long run average is still 19.9 for the dataset shown in the chart. The correlation between the PE10 and the Real (inflation adjusted by the CPI) FTSE Price remains a strong 0.70. In comparison the bog standard P/E ratio is currently sitting at 14.5, up from 14.5 last month.
My second chart shows Real Annual Earnings. In a month they have decreased from 399.5 to 394.1. This is however well up on 1 year ago when we were at 299.0. The big question for me though is whether these ‘high’ rates of around 400 are sustainable. For me 300 looks to be about the right level of real earnings if you ignore the credit fuelled excesses of the past few years.
As always do your own research.
- November 2010 price is the 01 November 2010 market close.
- UK inflation data from October and November 2010 are estimated.