Commenting on the FTSE 100 climbing to a five year high, Professor of Finance at Cass Business School, Meziane Lasfer has some concerns…
“My overall impression is that the market is too overvalued and there is no fundamental reason for the recent increase in share prices given the gloomy economic conditions. Investors need to be very careful in coming to the market.
“Firms need to consider the fact that the market is likely to be overvalued and, thus, they should refrain from making investment and financing decisions based solely on the performance of their stock price.
“In particular, they need to compute properly their cost of capital and incorporate the risks that the economy will not recover. This will result in a higher cost of capital and a rejection of a number of marginal projects which may lead firms to financial distress if the economic trends worsen.”
