It finally happened: markets are down 10% from their high, which is regarded commonly as a “correction”. Both the Footsie and the All Share are now just a shade below 90% of the highs established in February/March. I don’t know if the markets will go on to make a full-on bear market, but I reckon we are due for a rebound. The FTSE100 is oversold, with a 14d RSI of 22.8%. FTSE250 is at a similar level. Both are selling at similar trailing PEs: 16-16.4.
The T1X (FTSE Techmark Focus), which is a measure of innovative companies, is on a trailing PE of 21.9. That’s racy to the eyes of value investors (they certainly look racy to me). As a relative valuation to the wider market, it is 1.35 (=21.9/16.2). I am fond of comparing this type of ratio with the one in Beating The Street on page 66. Values below 1.2 imply that growth shares are extraordinary cheap (relatively). Values over 2 imply that they are are extraordinary expensive. It’s difficult to say where the historical average is, but 1.5 seems a good guide. On this basis, growth shares are comparitively attractive compared to historical norms. They are not no-brainers, though.
The H1X (FTSE 350 Higher Yield Index) is on a PE of 13.5. The LIX (FTSE 350 Lower Yield Index) is on a PE of 16.7.
What I infer from all this is that value shares do not seem sufficiently cheap enough as a class, whilst growth shares look attractive compared to the broader market. On that basis, I would expect growth shares to do well in a rally, and not so bad in further downturns. My worry is that, if the market goes full-on bear, value shares as a class are going to get hammered.
I would be interested to hear the views of other investors. Are you value investors out there finding lots of opportunities, or do you think that are slim pickings? The same goes for the growth investors, or indeed, the technical analysts, small/large cap and momentum traders out there.