The Valor Blog.
Investment News and Views, Direct from Our Team.

Is Australia getting carried away with this rally?

It is a very rough indicator, but the Australian share market forward Price Earnings (PE) ratio is currently trading at 17.78 (According to Commsec).

The Dow Jones is currently trading at 12.5 forward PE and the S&P500 is trading at 13.78 (According to the WSJ).

I certainly don’t see paying a roughly 30% premium for the Australian market at present as overly rational.

Unfortunately these numbers rely on analysts throwing numbers at a dartboard to predict the earnings of companies in the next 12 months. This suedo science is not very accurate, however I would guess it is slightly more accurate for larger more stable companies such as Coke and Proctor and Gamble, than for a volatile company such as a miner.

Perhaps Australia should be called the optimistic country rather than the lucky country? As a cautious investor, I would be very worried paying nearly 18 times earnings for a group of predominantly cyclical stocks (mostly miners and banks) which are much closer to the top of their cycles than the bottom and likely to have some headwinds in the next few years.