Valuations and price-to-earnings ratios are insufficient indicators in times of severe economic downturn. Swiss Life Asset Managers recommends investors to take a look at the fundamental data.
Valuations helps investors to determine the “fair value” of an investment. However, they are considered controversial. While some rely entirely on them, others consider them useless. And it is indeed a difficult task to anticipate the development of future returns.
A simpler method for calculating the realistic investment value takes into account the price-to-earnings ratio (P/E ratio). It is based on historical gains or short-term earnings expectations of financial analysts and is a useful indicator in quiet times. However, it fails spectacularly during sudden and dramatic economic downturns such as the current one. In such a situation, past profits and short-term profit expectations for the next few years become useless. Swiss Life Asset Managers advises investors to rely largely on fundamental data during highly volatile phases.