Quick Bite – Australian Valuations Look Stretched

July was a strong month for the ASX300, pushing the index to new record highs, however, the market is now looking a little stretched.

With the FY24 reporting season just around the corner, the market PE is trading around 17.1x, well ahead of its 10-year average, indicating it is clearly expensive in relative terms.

In the chart below, we observe that the average ASX300 PE is around 16x, showing that the market valuation is approaching two standard deviations above the average.

FactSet consensus forecasts the ASX300 will deliver flat earnings growth in FY24, however, will step-up growth in FY25-FY26 by 6% and 5.5%, respectively.

Of particular interest this reporting season will be the banking sector, which has become very expensive and should be treated with caution. Some will have noticed that CBA is trading around record highs and while the quality of CBA is hard to deny, its valuation is trading on a PE ratio that is approximately four standard deviations above its long-term average.

As a result, ASX300 companies will need to deliver strong earnings and outlooks to justify current valuations. However, we view that there are attractive opportunities on a bottom-up basis and that the upcoming reporting season will reward those that have done the work.

Source: FactSet