Contents
Editorial
6 10-year forecasts: the interplay between inflation and equity markets. But do not extrapolate forecasts from
the recent past!
6 Influence of inflation/deflation debate on equity markets
10 Ten-year equity market outlook (1)
10 Central scenario
11 Ten-year equity market outlook (2)
11 3 alternative scenarios: inflation, strong growth and deflation
Impact of inflation on shares
14 Impact of inflation on shares
14 Inflation acts on valuation
17 Inflation acts on the earnings cycle
10-year equity market outlook
20 Methodology
20 Methodology (1): three main steps
21 Methodology (2): equations
22 Step 1: the central scenario on a 10-year view
22 A return to normal growth levels unlikely before 2011/2012…
22 …and a gradual return of inflation
22 Inflation, the lesser of two evils
24 Step 2: forecasting P/Es 10 years out
24 The need to use normalised earnings series
25 The need to normalise the corporate tax rate
26 A genuinely normalised P/E based on Robert Shiller data
27 Estimated P/E trends over 10 years
29 Step 3: estimating EPS growth
29 S&P or Datastream: which earnings series should be used?
30 Modelling corporate earnings growth
Appendix
36 Table of long-term rates
36 10-year compound rate and annual rate
36 Performance by decade