Bloomberg’s market live blog yesterday made a case for Chinese shares offering better value in comparison with US stocks This was based on the price to earnings ratio. The price to earnings ratio is a common gauge for investors to decide on a stock price valuation. It is worked out by measuring the share price vs the earnings per share. This means that a high p/e ratio can mean that a companies stock is overpriced. Here is the calculation below.
P/E Ration = Market value per share / Earnings per share
Taking a look at the chart below you can see that the Nasdaq has a high blended forward P/E ratio of just around the 10 mark. This is higher when compared to the other major indices listed. The forward P/E ratio calculation is slightly different than the standard P/E ratio as it uses future earnings guidance rather than trailing figures.
Now the main reason for the Nasdaq’s high p/e ratio is that technology stocks have raced higher on the hopes of increased tech spending. Changes such as working from home, spending on software and hardware, and increased moves towards digitalisation are all expected to boost the profit hopes of the Nasdaq. However, have they gone too far?
The question going forward as we come into earnings season is whether or not the Nasdaq’s increased stock valuation can withstand an overall shrinkage in the US stock market as a whole. On a bargain p/e basis this means Chinese shares may offer a more stable path to ongoing gains given their lower valuations. Take a look at the Shanghai Composite below and you can see pricing breaking out of a key monthly descending trendline.