What members can expect!

Below is an excerpt from the members area showing some of the indicators and analysis that’s available; hope you find it of interest………………….


Market Conditions – Risk Levels

This is the my current view of the level of risk that exists for investment into UK Equities; it looks at a number of key measures that are then considered in their percentile rank (effectively putting them all in the same format) and then shown as a simple average.

risk april 2016

Comment – 6th April 2016

Risk has fallen over the last year as the FTSE-100 has declined from its April 2015 high; however the one reading I am suspicious of is the distance from 5 year low as the extended bull run is giving this what may be a false reading if we look back an extra year the index is actually around 75% above its 6 year low that would put it around the 60th rather then the 9th percentile as we see now.

It is always worth looking a little deeper to see if there is anything you are missing

Looking then at the moving averages of the percentile rank to “iron out” the noise (for a full explanation see review and use of a risk system) despite an improvement and the existence of possible value I am still loathe to commit to a strategy that is more than 20% invested in UK equities at present – I would need to see a significant upturn in the long term average (blue) before considering that decision.

Percentile rank april 2016


I cannot over emphasise the importance of NOT relying on any single indicator; things invariably change and even what was previously an extremely reliable part of the decision process can lead you up the garden path, by using a combination of indicators some (not all) of this risk can be reduced. Having looked at overall risk levels I like to take a look at fundamentals using twenty five “bellwether shares” from the FTSE-100 as a proxy for the index; analysing growth rates, profits, earnings and ratios before putting these together with some statistical analysis (see linear regression).

#1 Fair Value Estimates

Looking at historic price ratios over different time frames I have created a matrix that provides an indication of over or under valuation for the FTSE-100.

fair value estimate April 2016Comment 6th April 2016

The FTSE-100 is above fair value across most time frames with the exception of three years (6210.71).

Over 5-10 years estimates suggests that the index is anything up to 24.26% above fair value.

Both the PE and PE10 ratios suggest that the FTSE-100 should be higher – but not that much at around 6250-6278.

Price to Sales (PS) is one of the most reliable indicators of future returns for the index and it suggests that a fall of 13.7% would be needed to put the index at fair value.

An average of all indicators suggests fair value at 5899.33 and with the index at 6133 we are pretty close (within 4%).

This approach to estimating fair value has historically been a good indicator for investors – see the graph below.

fair value estimate graph April 2016

  #2 Prospective 5 Year Returns

Using statistics we based on historic price ratios you can create a predictive model of implied returns for the FTSE-100 from this point onward for the next five years p.a. this uses a broad range of ratios capturing data from both the income statement and balance sheet of the firms analysed.

implied returns april 2016

Comment 6th April 2016

Currently we can see that whilst the declines in the FTSE-100 have improved the implied return forecast this still remains at over -5.5% p.a. for the next five years.

Interestingly this fits in with some of the worst case scenarios from for the 5-10 year time frame from the fair value estimates (-5.5% p.a. means that the index is around 31% overvalued).

The indicators accuracy currently sits at just over 85% and other than a few instances where it has over and under shot (2003/2004 being the most notable) it has remained relatively stable.

Drawing it all together….

  • Levels of risk appear relatively low for the FTSE-100
  • This may be the result of some “false” readings caused by the prolonged bull market since 2009
  • The long term percentile rank would need to change direction to indicate that we were at or near a potential inflexion point
  • Short term there is probably a good chance of a move upwards but this may not be durable
  • This is confirmed by fair value estimates where short term indicators suggest some under valuation; longer term the though the picture is less healthy
  • The FTSE-100 may not be overvalued as in 1999/2000 or 2006/2007 but it does look at best slightly over valued
  • Prospective five year annualised returns remain negative despite the declines from April last year

Overall I see no reason to change my strategy from limiting equity exposure in the model portfolio until conditions change and a better opportunity to find value exists

Leave a Reply

Your email address will not be published. Required fields are marked *