The massive rally in the Chinese stockmarket has raised questions over whether equities are already in bubble territory. Price-earnings ratios can be subject to distortion, especially at turning points in the cycle. Another approach is to look at the ratio of prices to asset value, or price-to-book. Despite having risen this year, this measure has yet to reach its 2007 peak. Paying a premium to book value (the current ratio is around 2.6) can be justified if companies are earning high returns on equity. Dylan Grice, a strategist at Societe Generate, says that assuming a 10% hurdle rate, the current 17% return on equity warrants a price-to-book ratio of 1.7. This leaves equities, if notin bubble territory, more than fully priced.
展开▼
