Shares: Summary

Buy on the up arrows, sell on the down arrows

This tool is intended to show the overall attractiveness of shares based on fundamental analysis. The charts show the extent of over - or under-valuation of share prices compared to fair value generated by stock market modelling, from which Best Guesses as to the future are also generated. For comparability, stock market indexes have been rebased to set year-end 1994 at 100.

In each chart the stock market index is shown as the thick white line on the right hand axis. The main explanatory variables, fair value generated by using interest rates, shown as the yellow line, and bond yield, shown as the light green line,  use the left hand axis. Best Guesses for future fair value are also shown on the left hand axis. The Best Guess for interest rates is shown as the orange line. the Best Guess for bond yield is shown as the pink line.

Best Guesses suggest what would happen to fair value based on forecasts for interest rates, bond yields and company profits. Interest rates and bond yields are current actual figures. Company profits are econometric forecasts by PIT for the next year.

The model calculates fair values by taking the current level of interest rates and bond yields and next year's profits. Mathematically, P = EPS x 1/Y, where P is the level of share prices, EPS is company profits and Y is the bond yield or interest rate. Bond yields are the more appropriate basis for modelling but are only available for a limited range of countries. For some countries there is insufficient data to enable us to produce a meaningfu econometric model for generating Best Guesses about EPS.l

As historic data on whole market Earnings per Share is seldom available, this series has been derived from a variety of other sources of historic data. In order to achieve compatibility these have required considerable adjustments. Thus even the historic data should be considered as estimates only.

Please note the differences between these Summary charts and those for Bonds and Currencies. Since income is not a major consideration for investment in shares, stock market indexes are shown as price only and not in terms of total return. Technical Buy / Sell signals are shown in the Momentum share charts, using price-only indexes, so there is no purpose in duplicating them here.

Where European currencies have been converted into Euros, the legacy government bonds and interest rates of the individual countries have been used as the basis for historic data. Thus, for example, Deutsche Mark bonds are used for Germany and French Franc bonds are used for France up to year-end 1998, but both are now based on a common set of bonds denominated in Euros. Profits continue to be based on companies domiciled in each country.

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