‘Stocks aren’t ex­pen­sive’

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in­ac­cu­rate, this will bring the price-to- earn­ings ra­tio back down to­wards the longer term av­er­age.

Laith Kha­laf, of fund shop Har­g­reaves Lans­down, said: “When earn­ings are fac­tored in, val­u­a­tions in the UK mar­ket look rea­son­able – not cheap, nor ex­pen­sive. That means in the short term, the stock mar­ket can turn in ei­ther di­rec­tion with­out de­fy­ing the laws of statis­tics.”

Com­par­ing mar­ket value (the to­tal size of a mar­ket) with GDP ( gross do­mes­tic prod­uct) is one of leg­endary in­vestor War­ren Buf­fett’s favourite met­rics.

Russ Mould, of AJ Bell, said while com­pa­nies can fid­dle or em­bel­lish their own num­bers, they can’t do so to of­fi­cial statis­tics such as GDP – which mea­sures the value of all goods

and ser­vices pro­duced by a coun­try. The ra­tio of mar­ket cap to GDP is now ap­proach­ing record highs. It cur­rently stands at 113pc, com­pared to 131pc at the height of the tech bub­ble, and 114pc in 2007. The av­er­age over the past 29 years is 87pc.

“This is fair enough, as the ra­tio of cor­po­rate prof­its to GDP is also at a record high,” said Mr Mould. But that means cor­po­rate prof­its have to stay where they are to en­sure the in­dex main­tains its cur­rent level, and the ra­tio of earn­ings to GDP would have to move higher for the mar­ket to rise.

He said over half of the FTSE 100’s fore­cast earn­ings come from banks,

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