Quick Bites | Australian Sharemarket Valuations

Quick Bite – Australian Sharemarket Valuations

Every so often, we take a close look at valuations on the Australian sharemarket and try to ignore the noise of the daily news cycle. A useful way of doing so is by examining the excellent Investment Fundamentals piece periodically produced by Martin Crabb of Shaw and Partners and reproducing a few of its informative charts.

The first chart below uses an assessment of “Fair Value” modelled by Shaw (the black line). It shows the market as represented by the ASX100 index (orange line), and a grey line which indicates when one can expect the market to deliver a total shareholder return (TSR) of 15%.

At present, the ASX100 index is very close to fair value, and so the conclusion is that the market is almost fully priced – and that a 15% return is unlikely. Indeed, the TSR is only 4.9%, the majority of which is dividend yield, and with practically no expected capital gain.

Source: Shaw and Partners

We now look at the Price Earnings ratio, which is clearly in expensive territory at a multiple of forecast earnings of 18.7x. This is a lot higher than the long term average of 14.5x.

Source: Shaw and Partners

Of course, forecast earnings could be inaccurate, and growth in earnings per share might surprise on the upside. However, we do not think this is very likely, and the following chart shows that aggregate earnings over the last 3 years have basically been stagnant.

Source: Shaw and Partners

If we dis-aggregate profits into the 3 big market buckets of banks, resources and the market (ex-banks and resources), we note that non-bank industrials have grown quite well, banks have gone nowhere for a decade, and resources have tanked over the last 2 years.

Source: Shaw and Partners

The ASX100 has a similar net income profile to the rest of the world, but hasn’t managed to keep up with overseas EPS growth.

As we have noted on these pages frequently, banks and so-called defensive stocks are very highly rated on the Australian market. The Commonwealth Bank is presently on a forecast PE multiple of 27.3x which is truly extraordinary. The bank sector average is a very ritzy 20.9x – and this is a sector that is not expected to have significant future growth!

Source: Shaw and Partners

The CBA share price continues to astound:

Source: Shaw and Partners