What does history teach us about PE ratios and inflation?
If we look at the history of stock prices in developing markets during periods of high inflation, we find no pattern to suggest any particular level of PE ratios as being appropriate. In Brazil, during the 1960s, PE ratios of good companies ranged from 4 to 10 times earnings. In the early 1970s, these same companies were trading from 15 to 30 times earnings, with about the same rate of inflation. In Indonesia, during the early 1990s, with inflation about 6 to 8%, PE ratios of 20 to 30 times earnings were observed. In the extreme hyper-inflation of Brazil in the late 1980s, when the government allowed monetary correction of asset values and depreciation, stocks no longer traded on the basis of PE ratios, but rather in multiples of book value. In short, inflation causes great uncertainty about the real value of equities and stock prices tend to be volatile. Not unlike the situation in the US stock market today. Do you think that inflation of 25% is unrealistic? How realistic is the curre
