There are of course many ways in which to measure whether asset prices are cheap or expensive. When it comes to the share market, the price-to-earnings (PE) ratio is a useful, albeit incomplete and imperfect, metric that provides at a glance a sense of whether the market is sitting above or below its long-term averages.
Source: Morgan Stanley
With the ASX hitting record all-time highs, it is useful and interesting to have a look at a few charts. The chart below shows the ASX 200 forward multiple closed February at 16.3x. Over the last 30 years, the forward multiple has averaged around 14.6x.
Source: Morgan Stanley
But perhaps looking at the 30-year average is somewhat misleading, considering that for the last 10 years or so, market PEs have tended higher – likely as a function of substantially lower interest rates. The chart below shows that the forward PE for the ASX 200 has averaged around 15.7x over the past 10 years, that is, since 2014.
Source: Morgan Stanley
It is useful to “look under the hood” of the index, and examine its component parts. In the following chart, we see sectors split out from the ASX 200 Index, namely Resources, Industrials ex Financials, and Financials. This illustrates that Industrials are trading at a forward multiple of 23.2x, whereas Resources are trading at only 11.3x. This dispersion is not unusual and reflects different expectations for future growth in earnings.
Source: Morgan Stanley
The last chart shows how these sectors have performed over the past 12 months, with Banks shining, and outperforming Resources by a wide margin.
Source: Morgan Stanley
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