More to TSX value than P/Es

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.

David Pett