There are many factors that determine stock prices. One of them is stock valuation. We can be brief about that: It’s high, very loud. The price-earnings ratio for the global stock index is now 20 times the expected earnings. Usually this ratio is around fifteen. Low interest rates are one of the main drivers of this overvaluation.
Another important factor is profit growth. In addition to the Coronavirus, there are currently several temporary factors that are discouraging profits. The effects of “Deep Freeze” in Texas continue to cause production problems in various sectors there. The fire at a major Renesas chip plant in Japan has also had an impact on the supply of chips, especially in the automotive industry. And now the transverse ship has been added in the Suez Canal. Therefore, the supply chain of various industries is under severe pressure.
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But outside of all these temporary troubles, the future for profits looks bright. Globally, a profit growth of at least 23 percent is expected. Logical: Now that the end of the Corona crisis is nearing, a sharp economic recovery can be expected. Europe is hopelessly behind in this. The most important explanation is delayed vaccination coverage. There are many possible reasons for this; The UK, which keeps all vaccines for itself, the European Union is dormant and unfortunate.
But postponement does not lead to cancellation. Here, too, there is an economic recovery coming, after only a short time than was possible. The advantage is that European companies are very international. The recovery in Asia and now in the US is also driving higher demand from European companies. It is not without reason that we have witnessed a spike in mood among European PMIs this week.
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High inflation is also beneficial to corporate profits. This is one of the most frequently mentioned topics with these purchasing managers. And that’s cool: the higher the inflation rate, the higher the turnover and the ultimately higher profits. One condition is that wage costs may not rise any faster. Due to the weak economy, there is still a huge surplus capacity in the European labor market. So companies do not have to fear rising wage costs at the moment.
Moreover, at the same time limited economic growth ensures that interest rates will not rise. This has become a negative factor in the United States. Given the low vaccination coverage, the economic recovery in Europe is simply disappointing, but for European stocks it doesn’t have to be that bad. For us Europeans of course, but that’s not what this column is about.
About Cornet van Zigel’s column
“Travel enthusiast. Alcohol lover. Friendly entrepreneur. Coffeeaholic. Award-winning writer.”