n South African Journal of Economic and Management Sciences - Using an Inflation-Augmented Price-Earnings ratio to guide tactical asset allocation : corporate governance
|Article Title||Using an Inflation-Augmented Price-Earnings ratio to guide tactical asset allocation : corporate governance|
|© Publisher:||University of Pretoria|
|Journal||South African Journal of Economic and Management Sciences|
|Publication Date||Jun 2009|
|Pages||211 - 227|
|Keyword(s)||G11, G12 and G14|
ISI Social Science
Asset allocation plays a central role in determining investment outcomes, and available evidence shows that portfolio results can be enhanced through tactical asset allocation if managers use the simple price-earnings ratio as a predictor of equity returns. Recently, some international evidence has emerged which shows that, by augmenting the price-earnings metric with information about consumer price inflation, further enhancements can be achieved in tactical asset allocation. This study reviews these arguments as they apply to South Africa, and finds that an inflation-augmented price-earnings ratio is more successful in forecasting equity returns than is the simple price-earnings ratio. Moreover, the metric is found to be significant in explaining relative asset class returns. On a risk-adjusted basis, however, the tool fails to improve the portfolio results when compared to a buy-and-hold strategy.
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