The annual moment of truth has arrived. Companies are publishing their numbers for the full year of 2013 and it is time for us all to “brace for a moment of particularly inconvenient truth”, says John Authers in the Financial Times.
Profits aren’t rising fast enough to justify stock-market valuations. The market soared last year – forward earnings multiples are about 16 times at the moment. That’s “well above the historical average” of more like 13 times.
It’s also worth noting that, since 1976, the price/earnings ratio has only been above 17 for about 5% of the time – so the market rising from these levels without a huge surge in profits would be pretty unusual.
Worse, according to strategist Andrew Smithers, the Cape ratio and Tobin’s Q both tell us the same unsettling thing – that equities are knocking around the levels at which they peaked in 1936 and 1968. Those peaks were followed by “a weak economy and very poor equity returns”. Oh dear.
Still, despite this, Smithers, rather like us, figures that shares are more likely to go on rising than to fall “for the time being”. Why? Regular readers will know the answer: a bit of momentum and a whole lot of printed money.
Our advice then remains as it has been for some time: be in the market, but be in the cheapest parts of the market you can find. Over the last few years that has taken us all over the place – from the most rubbish parts of Europe to Russia and South Korea. However, now we are beginning to think it is time to look again at commodities.
There is now, as James Mackintosh points out in the FT this week, a “received wisdom” in the market that the commodity supercycle is over. Dead, gone and never coming back. Commodity prices are destined to be flat at best, fast falling at worst.
That’s why the Canadian dollar has fallen 17% against the dollar, why the Aussie dollar hasn’t been far behind, and why investors in mining companies had a shockingly awful 2013.
It is also why most people now firmly believe that no one in their right mind would invest in commodities, in companies connected to commodities, or, for that matter, in anything in the big commodity-exporting countries.
We love this kind of cosy consensus. It gives us something cheap to bet on. You can see the full case for buying into the “attractively priced” mining and big energy sectors (something we began to suggest very late last year), where David C Stevenson looks forward to a “full throttle rebound in commodity stocks” and points to the three funds he reckons will make you real money when it comes.