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Last week I was asked to write a Newsletter regarding the likely effect of Brexit. Following a logic-path I concluded there’s likely to be turmoil. Admittedly, there will be opportunities to buy when Mr Market gets really upset, but that comes at a later date.
Also brought to my attention last week is that FTSE 100 index is on a PE ratio of 34, while the FTSE All Share index is at 29 – both calculated using EPS for the most recent year.
At first, I thought this was a calculation-error or a misprint. After all, using the average earnings over the last ten years the UK market has a cyclically-adjusted price earnings ratio, CAPE, of around 13. And a year ago the one-year PER was only 17 or so.
If the PER using last reported earnings is at 30-odd and the PER using the last ten years of earnings per share is at 13, this must logically mean that UK shares have reported recent EPS which are only around 40% of the average EPS over 10 years.
That can’t be true, can it? Something is wrong.
I looked into it. It turns out that many large companies have reported losses or lowered profits recently. You can guess the worst hit sectors – banks, mining, oil and gas:
No profit companies: Anglo-American, Barclays, Glencore, Lloyds, Shell, BP, RBS, Rio Tinto, Intertek, Pearson, Standard Chartered.
Lowered profit companies with their one-year price-earnings ratios: Capita 126; Rolls Royce 136; TUI 48; Fresnillo 128.
Some other PERs: ARM 40; BHP 20; Hargreaves Lansdown 37; Sage 36; ABF 39; SAB 35; Randgold 45.
Such optimism
Because UK share indices have stayed pretty level, despite the fall in EPS, we have a clue on what Mr Market is thinking: These profits will bounce back soon.
But what if Brexit occurs, inducing a recession in the UK, causing a slowdown in Europe and general feeling of dread around the world?
My greatest worry is the direct effect of Brexit on confidence to invest in productive assets in the UK. But it really doesn’t help my mood that Mr Market thinks that a one-year PER of 30+ is OK – after all, he’ll say everything is going to be hunky-dory, isn’t it?
Well, just in case it isn’t going to be hunky-dory I’ve sold some shares that I was revving up to sell sometime in the next few months anyway. That’ll raise the proportion of cash in the portfolio, but still leave me with many shares that are in deep value territory.
Premier Farnell (LSE:PFL)
I bought this one in April 2016 for 122p. It is subject to an agreed takeover bid from a Swi……To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
