The American economist Robert Shiller is a Nobel laureate for several reasons.
One of them is the cyclically adjusted price earnings (Cape) ratio. Shiller’s device overcomes a serious defect in the more conventionally used price to earnings (PE) ratio which is often used to measure quickly whether a share is relatively expensive or cheap.The problem with the conventional PE ratio is that if earnings or profits are cyclically inflated, then even an inflated share price can be made to look reasonable.
Shiller’s elegant answer to this problem was to discard annual earnings as the “E” or earnings figure and to replace it with a measure of cyclically adjusted earnings. In order to generate a measure of corporate earnings that reflected the whole cycle, rather than risk being deceived by using cyclical peak earnings, Shiller opted to use average earnings from the previous decade instead.
By comparing today’s share price to average earnings over the previous decade — rather than just the earnings of the past 12 months — the risk that one may be misled by a temporarily elevated level of earnings is significantly reduced.
The advantage of using Cape as a measure of value is that it provides a useful predictor of future equity returns, at least when one uses it to measure value across an entire national stock market.
The best returns from investing in the US stock market were made in the past after its Cape had sunk to levels of 10 or lower. This happened, for example, in the 15 years after 1932, when the Cape hit 6, and 1982, when it hit 8.
Conversely, the worst returns have been made after the Cape has peaked above 25. That happened after 1929, when the Cape reached 30, and 2000, when it hit 44.
Today the US Cape is 25.5 and falling. That’s a medium-term equity market warning. So is Ireland’s elevated Cape of 27.4. Those looking for long-term equity bargains might look at the markets in Brazil (Cape of 7.4), Poland (9.1) or the Czech Republic (9.4).
And, if you want a bargain and have a stomach for risk, you can try Russia, where the Cape is a measly 4.6.
Cormac Lucey is the Programme Director of the IMI Diploma in Business Finance. Cormac is a Financial Services Consultant and Contractor who has previously worked with PricewaterhouseCoopers, Rabobank Frankfurt and the Department of Justice.
Even though it feels like crowdfunding has been around forever, I still often find one of two reactions when I discuss it with business people.
Source: www.sueddeutsche.de
The first (increasingly rare) reaction comes from those who haven’t yet heard of crowdfunding. The response from these people is typically one of polite but quickly-passing interest. The second group responds with “you mean Kickstarter?" and go on to tell me about a friend’s experience with their Pebble smart watch.
Very few people seem to appreciate the true scale of crowdfunding, which Massolution estimated to exceed $5 billion in 2013 and the World Bank predicts will reach $100 billion in 2025. Kickstarter, often the poster child for Crowdfunding, isn’t even the largest platform. While it has raised over $1.8 billion to date, this pales in comparison with US-based peer-to-peer lending sites such as Prosper (over $4billion) and Lending Club (over $9 billion, $1.6 billion of which was raised in the last quarter alone).
But people basically pre-purchase things, right?
There are several types of crowdfunding. Sites like Kickstarter, IndieGoGo, and RocketHub typically offer rewards, finished products, or other material benefits for contributing towards new products. Other platforms take a more transactional or economic view, facilitating donations in the form of commercial interest-based loans (e.g. Lending Club) or the sale of business equity in exchange for financial contributions (e.g. CrowdCube, Seedrs,).
Many also cater to fundseekers who offer no promise of financial or material reward. Instead, donors are encouraged to contribute to help those in need (e.g. Fundly, Crowdrise) or encourage economic growth in developing countries (e.g. Kiva). More recently, crowdfunding plugins have been used to embed fundraising directly within a company’s own website (e.g. IgnitionDeck).
Each of these offers their own advantages and attracts different types of backers. Typically, as rewards get more financially quantifiable, interaction with backers tend to be more formal and distant. As rewards become less tangible, backers tend to expect more responsive and personal dialogue from fundseekers.
Is this all about the rise of the Amateur Investor?
Much has been said about crowdsourcing and the rise of amateurism, e.g. amateur programmers, amateur photographers, etc. It’s therefore sensible to think of crowdfunding as the growth of amateur investing.
However, this doesn’t tell the full story. If it did, companies like Apple and Sony would be using sites like Kickstarter to gauge product interest, test ideas and generate income earlier in development cycles. Rather, the large majority of crowdfunding is characterised by an independent ideology.
Take the example of the Oculus Rift Virtual Reality development headsets, a project that received almost $2.5 million on Kickstarter. Many backers didn’t just want a headset, they wanted to be part of a revolution in Virtual Reality. These same backers were disillusioned when Facebook later acquired Oculus VR for $2 billion. This should arguably have been a cause for celebration. Yet these backers hadn’t pre-purchased a product, they had paid to participate in something – something that was no longer theirs.
Where’s this all going?
The idea that consumers would pay to be part of a crowd, that they would pay simply to participate in something, is powerful. It’s not simply an evolution of business practices; it’s a new phenomenon that presents new opportunities. Backers are not necessarily buying a product they may be booking a front seat for the future journey of a business. Further, this may not be a silent seat, they may expect to be heard when it’s time to make decisions (collectively, if not individually).
In return, businesses can potentially open up a market of hybrid investors/consumers with an unparalleled level of loyalty, shared vision, and longevity. The business world is only beginning to scratch the surface of what this means The true potential of crowdfunding is only beginning to be discovered.
Dr Rob Gleasure is a Lecturer at University College Cork, where he teaches a range of undergraduate and postgraduate courses relating to ebusiness and online crowd behaviour. Rob is also a Lecturer for the IMI MBS* in Digital Business. Rob's research focuses are on design science, the semantic web and Internet of Things and crowdsourcing/crowdfunding. Rob has published work on these topics in a range of international journals and conferences. Rob performs consultancy work in the areas of interaction design, design thinking and business process design.
*currently MBS but will transition to MSc subject to revalidation of the title.
[post_title] => Crowdfunding, you mean like Kickstarter?
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Economic growth expectations have been revised sharply downwards since the UK voted to exit the European Union. The asset manager Fulcrum has revised its 2017 British growth forecast down by 1.7% and for the eurozone down by 0.6% of GDP. Note that these are just 2017 forecasts. We are likely to see downward revisions in growth expectations for following years, too.
Source: cormaclucey.blogspot.ie
If the UK serves formal article 50 notice on the EU that it intends to exit by the end of this calendar year, we are unlikely to see the final contours of its future arrangements until late 2018 at the very earliest. And the EU trade commissioner Cecilia Malmstrom says Britain cannot begin negotiating trade terms with the bloc until after it has left. “First you exit, then you negotiate,” she told the BBC’s Newsnight.
If the UK must wait for its divorce arrangements to be finalised before it can negotiate its new trade arrangements, it may be the middle of the next decade before the fog of uncertainty finally clears.
At this stage, we are only in the foothills of danger, but we have perilous political mountains to traverse at a time when global economic storms are gathering. A fortnight ago, as he reclined in foothills pose, finance minister Michael Noonan sought to reassure voters that Brexit would not affect Ireland’s 2017 budget.
Last week, in mountainous pose, he was forced to admit that the situation was “evolving” and was “hard to get a fix on”.
The investment bank Morgan Stanley sees two possible scenarios for the UK’s conscious uncoupling from the EU. In the civilised divorce outcome, the relationship with the EU is progressively resolved, capping the negative hit to demand and keeping the British economy out of recession. In an acrimonious divorce scenario, “the sources of uncertainty interact with, and amplify, each other”.
Unfortunately, there is no shortage of acute uncertainties and dangers afflicting the EU right now. Will the pragmatic Angela Merkel or the doctrinaire Jean-Claude Juncker control the EU negotiators? Will Merkel remain German chancellor after next autumn’s federal elections? Will the Italian banking system — and Italy’s membership of the euro — remain intact? Will a gigantic economic crash in China plunge the global economy into recession?
The reality is that nobody knows for sure how Brexit will pan out. There are too many known unknowns never mind unknown unknowns. This uncertainty is already taking its economic toll.
European private equity transactions — the purchase and sale of private companies — slowed dramatically between the second half of 2015 and the first half of this year. The total deal value almost halved from €48.5bn to €25.6bn according to the Centre for Management Buyout Research. “The market is cooling off, with the EU referendum one of a number of challenges currently facing deal-doers,” it noted.
“There is evidence that some risks have begun to crystallise,” the Bank of England said in its latest financial stability report, published in London last Tuesday before concluding that the “current outlook for financial stability is challenging.”
The bank then facilitated increased lending by cutting its capital requirements for UK banks and pledged to implement any other measures needed to shore up their financial stability following the Brexit decision.
The Bank of England will do what it can to prevent the UK entering into recession. So will the British government, starting with chancellor George Osborne’s commitment to reduce corporation tax rate to 15% or lower. “What’s done is done,” Osborne stated. “The British public have spoken. We should accept their verdict instead of moping around or trying to unpick it. We must focus on the horizon and the journey ahead and make the most of the hand we’ve been dealt.”
The challenge for Osborne and his successor is that, while a reduction in the corporation tax rate is likely to have a positive long-term effect, it may have only a limited effect in the short term when Britain most badly needs a policy boost. The problem for policy-makers is that the cupboard is pretty bare when it comes to the most conventional form of short-term economic boost: fiscal stimulus.
The UK is only just getting its public finances back in order following the convulsion of the global financial crisis. But Osborne has now abandoned his target to get government finances back into balance by 2020. So if it has little or no room for manoeuvre on fiscal policy, how can Britain avoid a recession?
It has two remaining policy levers. It can run a stimulative monetary policy. That would mean relaxing some bank regulations, keeping interest rates lower for longer and more aggressive quantitative easing, aka money printing. The Bank of England governor has already signalled his readiness to consider all this.
The second policy lever that the UK has is its exchange rate. This will be heavily influenced by its monetary policy. Suppose, theoretically, that the Bank of England proposed to use quantitative easing to double the quantity of sterling issue. And suppose that markets expected the quantity of other currencies to remain fixed. Then, all other things being equal, we would expect sterling to halve in value against other currencies.
This simple theoretical example shows why the suggestions that UK monetary policy might be eased further has coincided with a significant drop in sterling. Since the evening of the Brexit vote, it has dropped 10% against the euro and 12% against the dollar. I expect sterling to fall still further over the coming months.
Allowing the pound to drop sharply against other currencies is a relatively low-cost way for Britain to adjust to weaker economic output and to its extremely large balance of payments of deficit, or excess of imports over exports. As the IMF recently commented: “The current account deficit has risen substantially in recent years, reaching 5.2% of GDP in 2015 . . . the widest deficit among advanced economies.”
Letting sterling take the strain of economic adjustment is something that the British have done before. Between 1972 and 1976, the pound fell by 40% against the dollar. Between 1980 and 1985, it dropped 55%. And between 2007 and 2009, it fell 35%. Since it peaked in 2014, sterling has already dropped by over 20%. So don’t be surprised over the next few years to see sterling fall by another 20%-30% from current levels.
But there is a problem in letting sterling slide in order to export recession and import economic stimulus. Other countries and currency blocs simultaneously want to do the same thing. Like the UK, the eurozone and China have an excess of debt and limited room for fiscal manoeuvre. They too want to see their currencies drop.
And it is a simple impossibility for everybody to drop their currencies against everybody else.
Cormac Lucey is the Programme Director of the IMI Diploma in Business Finance.
Cormac is also a Financial Services Consultant and Contractor who has previously worked with PricewaterhouseCoopers, Rabobank Frankfurt and the Department of Justice.
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[post_title] => Only in the foothills of currency danger
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Cormac Lucey
14th Mar 2017
Cormac Lucey is the Programme Director of the IMI Diploma in Business Finance.
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A medium-term equity market warning
Crowdfunding, you mean like Kickstarter?
Only in the foothills of currency danger
Equities: Should we be buying or selling?
There is compelling evidence that the risks of a recession rise as an economy approaches full employment and begins to overheat.
US economic growth looks like it will remain firm over the next 12 months, but will then begin to slow from its above-trend pace as the economy runs out of spare capacity. Fiscal stimulus, by the time it is eventually enacted, may simply end up pushing up wages, interest rates and the dollar, rather than boosting company profits. And there is compelling evidence that the risks of a recession rise as an economy approaches full employment and begins to overheat, although that usually happens with interest rates a lot higher than where they are now.
US equities have risen by 10 per cent since Donald Trump’s election last November. And Irish equities have risen by the about the same amount. But the sharp rise international equity markets may be due for a pause or even for a short-term reversal. For both equity markets are very richly valued right now. And several short-term sentiment indicators suggest that investors are overly optimistic: in the past, that’s been a reliable signal of poor returns over a 1-3 month horizon.
The most important long-term valuation metric I look at is a national market’s CAPE, or cyclically adjusted price-earnings ratio. It compares the price of a market with its average earnings over the previous decade. Academic research looking back at data as far back as 1881 has established a very clear relationship: the lower a market’s CAPE when it is bought, the higher the subsequent returns over a 10-year period. Both Ireland and the USA currently have CAPE measures above 25. That indicates that they are expensive and, if the past is anything to go by, are likely to generate real annual returns (after allowing for inflation) of only 2-3% over the next decade.
The CAPE is a long-term valuation indicator, rather than a short-term signal. So it would be possible for equity markets to rise by another 10% this year and to then produce even lower returns over the subsequent 10 years and still track the historical pattern. But there are many short-term indicators that equity markets are overbought which suggest that is unlikely.
Investor sentiment in the USA is now extremely optimistic. The current level of 62.7% bulls, 16.7% bears compares to other major market peaks in recent decades as follows: October 2007: 60.2% bulls, 21.5% bears; March 2000: 55.7% bulls, 26.4% bears; August 1987: 60.8% bulls, 19.2% bears. And “complacency reigns” according to BCA Research’s Complacency-Anxiety Index. That suggests that now is a better time to be selling equities than to be buying them.
Cormac is also a Financial Services Consultant and Contractor who has previously worked with PricewaterhouseCoopers, Rabobank Frankfurt and the Department of Justice.
Source: www.sueddeutsche.de
The first (increasingly rare) reaction comes from those who haven’t yet heard of crowdfunding. The response from these people is typically one of polite but quickly-passing interest. The second group responds with “you mean Kickstarter?" and go on to tell me about a friend’s experience with their Pebble smart watch.
Very few people seem to appreciate the true scale of crowdfunding, which Massolution estimated to exceed $5 billion in 2013 and the World Bank predicts will reach $100 billion in 2025. Kickstarter, often the poster child for Crowdfunding, isn’t even the largest platform. While it has raised over $1.8 billion to date, this pales in comparison with US-based peer-to-peer lending sites such as Prosper (over $4billion) and Lending Club (over $9 billion, $1.6 billion of which was raised in the last quarter alone).
Take the example of the Oculus Rift Virtual Reality development headsets, a project that received almost $2.5 million on Kickstarter. Many backers didn’t just want a headset, they wanted to be part of a revolution in Virtual Reality. These same backers were disillusioned when Facebook later acquired Oculus VR for $2 billion. This should arguably have been a cause for celebration. Yet these backers hadn’t pre-purchased a product, they had paid to participate in something – something that was no longer theirs.
