Today we have a look at ASX valuations as of the end of September 2024 and draw upon Martin Crabb’s well regarded analysis and charts, with thanks to Shaw and Partners.
The first chart calculates a “fair value” for the ASX (black line), with the grey line showing where the market needs to be to expect a 15% total shareholder return over the next 12 months, and the orange line showing the market (ASX 100 index). Ideally, you want to be buying into the market when the fair value indicator (orange line) is close to or below the grey line, indicating future returns of 15% or more. Because the orange line is a touch above fair value, the market looks expensive.
Source: Shaw and Partners
The next chart shows the market’s Price Earnings ratio (PE), which is based on forecasts of the next 12 month’s earnings.
Source: Shaw and Partners
In the second chart above, we observe that the market is trading on a high PE ratio of 18.6x next year’s forecast earnings. This is a lot more expensive than the historic average PE of around 15.5x (last 10 years). Of course, a lot will depend on whether or not those future earnings forecasts are accurate: if the market surprises with better-than-expected earnings, then the PE will be reduced and not look as pricey. But at this stage, the earnings outlook for the ASX is quite lacklustre.
The next chart splits the market’s forecast earnings into Resources and Industrials to get a better look at its component parts.
Source: Shaw and Partners
Looking at Resources and Industrials separately, one notes that whereas Resources forecast profits have declined quite sharply, Industrials appear to be steady. Remember that commodity prices are volatile, and therefore earnings for Resource companies can bounce back quite quickly if the macro environment changes. Indeed, with the US Federal Reserve cutting rates and China following with a significant stimulus program, commodity prices have risen sharply over the past couple of weeks and therefore forecast earnings might start to rise again.
Commonwealth Bank of Australia (CBA) is looking very expensive
Source: Shaw and Partners
We’ve written and spoken extensively about how expensive CBA is compared with both its own long-term valuation metrics and international and domestic peers. The above chart shows that CBA’s long-term valuation tends to average around a PE of 14x. At present, it is trading on a PE of 22x. What could account for this unusually high valuation? It may be the lack of alternative high-quality banks on the ASX, the flow of index funds, and overseas asset allocators putting money to work in Australia and not being concerned with valuations.
Our last chart breaks up the market’s components into various style characteristics:
Source: Shaw and Partners
