Why cash flow is tipped to be the new king of valuations: Epoch

February 17, 2022

Speaking to Australian advisers on Wednesday, Epoch managing director and portfolio manager John Tobin, said the next decade would be challenging for investors looking to generate returns simply from shares going up, as reported by The Australian Financial Review:

New York-based fund manager Epoch Investment Partners says the era of price-to-earnings multiple expansion driving markets is over, and cash flow will become king as inflation forces bond rates higher.

Expanding P/E multiples have helped advance gains on global sharemarkets over the past few years but also created a volatile bubble of expensive stocks, which have started to deflate.

“As we look at the interest rate trajectory going forward, we think the P/E expansion surge that drove equity returns in the past few years is likely over,” he said. Bank of America modelling for the next 10-year period showed the return was “actually likely to be slightly negative”, he said.

Mr Tobin said the market was entering a period of above-trend economic growth and inflation, which was less transitory than expected.

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