New equity market valuation model discussed by Oliver Wyman
CEO at Davos
NEW
YORK, June 2, 2022 /PRNewswire/ -- The Oliver
Wyman Forum, Oliver Wyman's research
and leadership community, today published the third in a series of
five white papers that, taken together, provide one of the most
comprehensive analysis of the US financial markets ever developed.
Oliver Wyman is a business of Marsh
McLennan (NYSE: MMC).
"Overhauling the Science of Valuations" combines finance,
accounting, analytics, economics, history, and sociology to
re-imagine concepts of financial analysis that were developed half
a century ago but that have stagnated ever since.
This white paper has broad
reach:
First, it introduces a new equity-market valuation metric that
is timelier than the price/earnings (P/E) ratio and less volatile
than the cyclically adjusted price/earnings ratio (CAPE) based on
10-year-average earnings. In other words, the new valuation metric
beats both on even their best features.
Second, the paper reveals 10 critical insights into the US
economy and markets that are not part of the common knowledge of
professional investors, but should be. For instance, we show that
breakeven inflation expectations are a poor measure of the market's
view of expected inflation, but a very good, if misunderstood,
measure of risk conditions.
Third, it confirms that the traditional CAPM fails in practice,
but also that the failure is due to executional issues. It proceeds
to fix those issues and show that the re-engineered CAPM is a
powerful explainer of equity prices over the last century and a
half.
Finally, the paper turns to the Treasury market, highlighting 10
largely unknown risks that both influence long-term Treasuries and
hide the true risk-free interest rate that helps determine whether
equities are over- or undervalued.
Nick Studer, CEO of Oliver Wyman, discussed the new model recently
during a panel discussion at the World Economic Forum titled How
Detached Are Markets from Economic Reality? The discussion included
senior leaders from the public and private sectors and examined how
the markets have remained relatively buoyant despite the pandemic,
supply shocks, and geopolitical conflict.
Jacques Cesar, a former managing
partner of Oliver Wyman and the
author of the five white papers, notes that different parts of the
third paper will interest different communities. For example, the
academic community will be most interested in the reengineering of
the CAPM. Treasury and Federal Reserve officials will be most
interested in the quantification of the linkage between tax and
monetary policy and equity prices. And investors and money managers
will improve their decision-making by leveraging the highly
accurate modeling of the true drivers of equity and Treasury
prices.
About the Oliver Wyman
Forum
The Oliver Wyman Forum is Oliver
Wyman's think tank, dedicated to building leadership
communities to drive new solutions to shared global challenges. The
Oliver Wyman Forum engages leading thinkers and develops new
research to inspire action based on innovative insights on three
fronts: Reframing Industry, Business in Society, and Global
Economic and Political Change. Together with our growing and
diverse community of experts, we focus on making a difference. For
more ideas, sign up to receive Ready or Not, our monthly
newsletter, follow us on LinkedIn, or visit
www.oliverwymanforum.com.
About Oliver Wyman
Oliver Wyman is a global leader
in management consulting. With offices in more than 70 cities
across 30 countries, Oliver Wyman
combines deep industry knowledge with specialized expertise in
strategy, operations, risk management, and organization
transformation. The firm has more than 5,700 professionals around
the world who work with clients to optimize their business, improve
their operations and risk profile, and accelerate their
organizational performance to seize the most attractive
opportunities. Oliver Wyman is a
business of Marsh McLennan [NYSE: MMC].
For more information, visit www.oliverwyman.com. Follow
Oliver Wyman on Twitter
@OliverWyman.
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SOURCE Oliver Wyman Forum