Forum Archive Index - May 2004

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi winner69,
 
> 
>How about assessing an equity risk premium based on a 
>prospective view from where the market is currently at?
>

An excellent suggestion.

>
>The prospective equity risk premium can be expressed as 
>Current Earnings Yield plus Inflation (proxy growth rate)
>less Government Stock Returns (the risk free case).
>Makes sense as the earnings yield plus inflation represents 
>the value of future cash flows from equities compared to the 
>risk free rate of government stock.
> 
>So in NZ what is the prospective equity risk premium?  
>With an average p/e of the top 50 about 
>18 the earnings yield is 5.5%, 
>

Do you have a source for those figures?

>
>inflation expected to be say 2.5% and with 
>long term government stock returning about 6% the 
>prospective equity risk premium is currently about 2%.
> 

(5.5%+2.5%)-6.0%=  2%,  yes.

>
>This 2% is a little lower than the general figure of 3-4% being seen
>as an appropriate figure. 
>

And Price Waterhouse Coopers have suggested a risk premium of 
7.5% for the NZ market according to Dean, although I think that 
includes the inflation component.     So that means P.W.C. are using a 
non-inflation adjusted equity risk component of  7.5 -2.5= 5%.  What 
the?

>
>Maybe the NZ market is currently slightly overvalued or 
>as Snoopy suggests that the NZ market is a much 'safer'
>place to be than overseas markets.
> 

Let's leave the comparison with overseas markets out of it this time, as 
that is a separate argument.   If the risk premium on NZ shares is really 
only 2% Winner, then isn't Mr Market telling us that NZ shares are 
rather safer in comparison with NZ bonds than is generally believed?

SNOOPY


--
Message posted by Harry Tennyson
 using Pegasus Mail 4.02
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