GLOBAL - The collapse of Enron has exposed massive overvaluation of US stocks, dashing hopes for a global recovery, according to claims by the Centre for Economics and Business Research (CEBR).
The CEBR said US government statistics on profits made by companies quoted on the New York Stock Exchange (NYSE) between 1993 and 2000 are actually 27% lower than those claimed by the companies themselves.
CEBR chief executive Douglas McWilliams said: “Our strong prejudice is that statisticians are much more accurate in measuring variables like company profits than company accountants and auditors.”
McWilliams calculates that on prices quoted at the end of 2001, companies listed on the NYSE were still overstating their profits by $130bn per annum. He said that if the figures were truly reflected they could knock around 1500-2000 points off the Dow Jones Index.
He also blamed the discrepancy in part on lax US auditing standards and the fact that many US executives' salaries are heavily linked to company profits, heightening the incentive to make profits appear more rosy.
These gloomy views of the US market in light of Enron are being backed up by fund managers. Barclays Global Investors asset allocation strategist Noel Mills claims that fears of the US stocks hiding another potential collapse like Enron were hitting market confidence.
Mills said: “Post-Enron, all companies will become subject to a more conservative accounting regime. The simple logic of this is that the high profits expectations currently embedded in share prices will be that much harder to achieve.”
This gloom was shared at Royal London Asset Management which has increased its allocation in defensive stocks by 10% at the expense of cyclical stocks. Head of international equities Philip Lawlor said: Many people believe the markets are on the cusp of a recovery but I think this is premature. It is going to be a very bumpy road to recovery.
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