By Philip Lawlor, head of Global Investment Research
The upsurge in forward PE multiples to decade highs since March, particularly in the US, has raised legitimate concerns about the risks of elevated valuations. But drilling down to the sector level—and taking a relative perspective—reveals that this global post-crisis rerating has not been uniform.
Regional 12-month forward price/earnings multiples (×)
Source: FTSE Russell / Refinitiv. Data as of September 15, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.
With few exceptions, global sector forward PE multiples have also reached some of the highest absolute levels in 10 years. Unsurprisingly, the technology and consumer services sectors have seen some of the most pronounced forward PE re-ratings relative to their 10-year averages (see first two columns in table below).
However, despite the big move in absolute valuations, there are four industry groups (basic materials, utilities, financials and health care) that are not only trading at discounts relative to the market but also to their own long-term average relatives (last two columns).
FTSE World 12-month forward PEs by sector vs 10-year absolute and relative averages
Source: FTSE Russell / Refinitiv. Data as of September 15, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Outperforming health care still at a relative PE discount
The risk/return profiles for the 10 FTSE World sectors in the chart below put current valuations into perspective. The obvious standout is the technology sector: its huge premium valuation comes after a vastly superior performance versus every other sector over the past year, with only marginally higher volatility than the world index.
In stark contrast, however, health care, which has outperformed all but technology with far less volatility, trades at a significant discount relative to the world index.
FTSE World sectors—1-year risk/return profiles (local currency, %)
Source: FTSE Russell. Data as of September 15, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
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