Investors all over the world are moving to cash. They are being driven by fear and the need to meet liabilities elsewhere.

Good companies and bad companies are getting caught in the downdraft, with high-risk investments such as those in emerging markets suffering the most.

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In fact, the FTSE 100 appears astonishingly undervalued when you look at earnings multiples. Take a look at the current p/es of these major indices:

FTSE 100 p/e 8.77
CAC 40 p/e 9.65
Dax p/e 10.53
Dow p/e 12.23


The FTSE 100 is also yielding 5.53%, the highest of the four indices quoted above.

The FTSE 100 is trading on a current p/e that is significantly lower than the bear market low following the dot-com bust. On 12 March 2003, the FTSE 100 was trading on a multiple of 14.4.

The FTSE 100 is also trading well below its historical average. But that is because investors expect earnings to slump next year as the recession bites.

However, even if earnings across all companies in the FTSE 100 fall 50%, the index would be trading on a p/e of 17.

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The fact remains that the FTSE 100 looks in oversold territory relative to other indices (especially the Dow) and relative to history.

That’s because confidence has evaporated. There may be further falls to come in our blue-chip index, but the Dow appears to have much further to fall if the situation turns more negative.

Despite its historic undervaluation, the FTSE will not see significant rises until the global banking system is recapitalised. This will take some time. But once this has happened, I expect the index will recover as the global economy gets back on track.

Now, of course there is the possibility that multiples will fall further. Analysts at Mirabaud Securities pointed out last week that history shows this is possible. .

Its research indicated that, before 1985, the market “frequently” traded below 8 times earnings in times of crisis. It also said that in the UK between 1962 and 1972 “trend p/es were rarely above 9 times”.

One reader wrote to me last week and said that in the 1970s he had managed to buy BHP Billiton shares at a p/e of 3. He later sold them for a p/e of 35. Now that’s a great investment. I expect opportunities like this will throw themselves up in the coming months. But gains like this will only come to patient investors.

It is for this reason I am not selling any of my shares or any of the shares in the Smart Commodities UK portfolio.

Six months ago I liquidated around two-thirds of the shares we held and focused on core long-term positions. The reasons I recommended these companies are still intact. I expect they will recover once sentiment improves.

To discover more about the recommendation in Smart Commodities UK click here.

Regards,

Garry White
Editor
Smart Commodities UK

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