When it comes to price/earnings ratios, the TSX may not be that attractive compared to other major markets. As for that other valuation metric, price-to-book value versus return of equity, it stacks up quite nicely, says George Vasic, UBS strategist.
"One key conclusion that emerges is that while the TSX’s forward P/E looks expensive relative to other major markets," said Mr. Vasic, noting Canada's top benchmark exchange trades at 13.8x vs. 12.7x for the US and 12.1x globally for the non-financials.
"More comprehensive valuation measures show it to be closer to in line. Indeed, the TSX’s P/BV is very close to the global relationship to ROE, with the US notably above the UK below."
He added that P/Es show a range of 9.1x to 18.7x for the seven major global region, while the P/BV vs. ROE is a more tightly clustered measure. As a result the latere valuation metric is much more robust.
"Indeed, it explains why we have advocated what has been seen as a lofty target of 13,500, which in fact represents fair value (in 12 months) based on the TSX’s own relationship among these variables over the long term," the strategist said.