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Forecasting the Footsie (or is buy and hold dead)?

An excellent book landed on my desk before Christmas called How to Value Shares and Outperform the Market by former Cazenove banker Glenn Martin. Martin takes a swing at most investing ratios like the PE as they completely ignore the prevailing economic environment. Martin rationally sets about showing how investors can create a valuation spreadsheet for the FTSE 100 incorporating the current price and yield of the FTSE and the current level of inflation and interest rates. By using the historical norm of a 2% real annual dividend growth rate the system suggests that the FTSE is 43% undervalued while using this system in reverse suggests that the market is currently expecting dividends to decline by 3.5% per year for 5 years which would be the * worst 5 year decline since 1980* – are things really that bad? Even my ?disaster scenario? using the system which anticipated a spike in inflation and rates and a crashing dividend payout only suggested a 10% fall for the FTSE suggesting that there?s not too much downside by these metrics. Martin?s system has a pretty good track record over the last 20 years but its dependence on the difference between bond and dividend yields reminded me of the much maligned Fed Model which was popularised during the Greenspan years.

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