Investors are advised to remain cautious and avoid stocks with high price-to-earnings (PE) ratios, weak cash flows and low earnings growth, as equity markets are overheating, Standard Chartered Bank Taiwan Ltd (渣打台灣銀行) said on Tuesday.
“We do not think that major stock markets are in a bubble now, although some securities’ PE ratios have been pushed too high as their share prices advanced,” head of investment strategy Allen Liu (劉家豪) told the Taipei Times at a meeting in Taipei.
Liu was referring to the ratio of a company’s stock price to its earnings per share. Companies with high PE ratios are often regarded as overvalued.
“However, given ample funds due to governments’ relaxed monetary policies and quantitative-easing programs, companies with high PE ratios are not necessarily bad targets,” Liu said.
Companies with high PE ratios could still be worth a look if their earnings are expected to grow this year, as higher earnings per share would drive down their PE ratios to a more reasonable level, he said.
Besides, firms that would benefit from future economic trends, such as digitalization or self-driving vehicles, could be good targets as their growth momentum could last longer, he said.
That is why some local tech stocks, whose profits have not risen significantly, have kept on advancing, as investors are banking on them benefiting from these trends, Liu said.
“It is safer and more important to buy the right stocks at a higher cost than buying cheap, but wrong stocks,” he added.
Investors should also check companies’ cash flow, he said.
A company that forecasts rising profits, but has cash flow problems might not be trustworthy, he said.
HSBC Global Asset Management Taiwan Ltd (匯豐中華證券投信) chief investment officer Julian Lin (林經堯) on Wednesday also said that stock markets are not in a bubble yet, as governments’ quantitative easing programs are forecast to continue.
Given that the real economies have not returned to their pre-pandemic level in most countries, governments would not end quantitative easing quickly unless there is serious inflation, which means there would still be ample funds supporting bull markets, Lin said.
With a low interest environment predicted to continue this year, people can invest in stocks for better returns, but need to be careful and agile in adjusting their portfolio, HSBC chairman Steve Lee (李選進) said.
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