- Pandemic rebound forecasts make it harder to assess the fair value of shares
- Uncertain long-term outlook affects the assumptions of valuation models
It has never been harder to work out how much to pay for shares. On the one hand, there is vast uncertainty for many sectors of the global economy, which brings dangers for established industries and opportunities for disruptors. On the other, low bond yields are encouraging stockpickers to demand less than they used to for taking risks.
The required returns implied by share prices are based on the market’s assessment of the present value of the future profits and cash flows companies will generate. The problem is, up to two-thirds of equity market valuation is based on long-term assumptions, which is most difficult to forecast accurately. Add to that the fact short-term earnings growth trends and dividend policies have been distorted by the impact of Covid-19 and the job of assessing fair value becomes immensely difficult.