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Price Earnings Multiples as Forecasters of Short Term Stock Returns in Egypt

Price Earnings Multiples as Forecasters of Short Term Stock Returns in Egypt The study examines determinants of price earnings PE multiples and their ability to forecast short term returns in the Egyptian stock market during the period from 2002 to 2007. Three factors were tested for their ability to determine the PE multiples. The three variables are growth, payout and return on equity ROE in the period from 2002 to 2005. Only Payout and ROE were found to be significant. The ability of past average PE multiples to explain and therefore forecast future short term returns were tested. Short term returns as measured by changes in stock prices from 2006 to 2007 were regressed against the past average PE multiples in the period from 2002 to 2005. The results indicate that the past high or low PE multiples give no insight on the direction and magnitude of future short returns. An important finding of the paper is that expectations about above average future growth can influence PE multiples more than the average past growth. This happens when the economy or some sectors of it are expected to witness far more growth than its past. It is therefore recommended for future studies that a quantitative or qualitative measure of future expectations should be included in the PE determinants formula in Egypt or countries expected to have very high or above average future growth in some of its sectors. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic and Administrative Sciences Emerald Publishing

Price Earnings Multiples as Forecasters of Short Term Stock Returns in Egypt

Omran, M.F.
Journal of Economic and Administrative Sciences , Volume 25 (1): 20 – Jun 1, 2009
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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1026-4116
DOI
10.1108/10264116200900003
Publisher site
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Abstract

The study examines determinants of price earnings PE multiples and their ability to forecast short term returns in the Egyptian stock market during the period from 2002 to 2007. Three factors were tested for their ability to determine the PE multiples. The three variables are growth, payout and return on equity ROE in the period from 2002 to 2005. Only Payout and ROE were found to be significant. The ability of past average PE multiples to explain and therefore forecast future short term returns were tested. Short term returns as measured by changes in stock prices from 2006 to 2007 were regressed against the past average PE multiples in the period from 2002 to 2005. The results indicate that the past high or low PE multiples give no insight on the direction and magnitude of future short returns. An important finding of the paper is that expectations about above average future growth can influence PE multiples more than the average past growth. This happens when the economy or some sectors of it are expected to witness far more growth than its past. It is therefore recommended for future studies that a quantitative or qualitative measure of future expectations should be included in the PE determinants formula in Egypt or countries expected to have very high or above average future growth in some of its sectors.

Journal

Journal of Economic and Administrative Sciences – Emerald Publishing

Published: Jun 1, 2009

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