Sorry rapstar, I did write a longer reply but lost it due to internet.
Basically I know nothing of the true affect of bond yield on company valuation so take this with a pinch of salt. I know Ben Graham uses it in his model but I've never used it. I will be learning from you.
My feeling is low bond yield is likely to lower the sp drop risk of a quality company. More money flowing into the market. To me a company value is based on ROE, share holder equity, outstanding share and risk to investment. I.e. CSL 10% return as strong business. BTH 30% return due to higher risk.
We have no idea what is going to happen in these unprecedented time so any valuation that factors in a higher risk is best.
Given the RBA has initiated the follwing measures:
1) Reduction of cash rate to 0.25%. This rate in not expected to move for an extended period of time, given unemployment is likely take years to recover.
2) RBA purchases of Govt. backed securities to acjieve a medium term bond yield of 0.25%
3) RBA provided funding to banks at 0.25% to support credit to small / medium sized businesses to a value of up to $90 Billion.
So, given there are virtually no returns to be had in govt back bonds, what will this do to stock asset valuations? Will money be chasing 4-5% returns in the sharemarket in the medium term? Should DCF's be discounted to 4-5% rather than 10%? Interested to hear opinions on asset valuations going forward,