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South African Journal of Economic and Management Sciences

On-line version ISSN 2222-3436
Print version ISSN 1015-8812

S. Afr. j. econ. manag. sci. vol.12 n.2 Pretoria Jul. 2009




Using an inflation-augmented price-earnings ratio to guide tactical asset allocation



AD Saville1

Gordon Institute of Business Science, University of Pretoria




Asset allocation plays a central role in determining investment outcomes, and available evidence shows that portfolio results can be enhanced through tactical asset allocation if managers use the simple price-earnings ratio as a predictor of equity returns. Recently, some international evidence has emerged which shows that, by augmenting the price-earnings metric with information about consumer price inflation, further enhancements can be achieved in tactical asset allocation. This study reviews these arguments as they apply to South Africa, and finds that an inflation-augmented price-earnings ratio is more successful in forecasting equity returns than is the simple price-earnings ratio. Moreover, the metric is found to be significant in explaining relative asset class returns. On a risk-adjusted basis, however, the tool fails to improve the portfolio results when compared to a buy-and-hold strategy.

JEL G11, 12, 14



“Full text available only in PDF format”



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1 The author would like to thank Douglas Mbululu for his research contribution in bringing the paper to completion and for the suggestions he made for improving the final product. The author would also like to thank Evan Gilbert, Warwick Lucas and Zane Spindler for helpful comments and editorial suggestions on earlier drafts of this paper. The author also would like to thank the two anonymous reviewers for comments and suggestions that have contributed to this paper. The usual caveats apply.

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