Markets are like teenagers — temperamental and easily bored. They love a “new thing”. This year’s equity markets have seen most stock prices fall, but a tiny number rise impressively — mainly the technology companies that dominate the global index. The valuation of some of these companies is now far removed from that of other stocks.
Take, for example, Apple, which alone represents 5.2 per cent of the global index (and is up 43 per cent so far this year). A common measure for valuing a company is the ratio of its share price to earnings — the “PE ratio”. Apple’s PE ratio is 29x. It offers a dividend yield of 0.6 per cent and is expected to grow its earnings by 8.8 per cent next year.
In comparison, the whole of the UK equity market represents just 3.9 per cent of the global index. Its price/earnings ratio is 10x. It offers a dividend yield of 4 per cent and is expected to increase earnings by 7 per cent next year.