Shane Oliver yesterday declared a good year ahead for shares. Half of his reasoning was good. The macro half, which forecasts a modest rebound for China, grinding recovery for the US (dodging the fiscal cliff) and an ongoing recession/struggle for Europe. Total growth 3.5%, up 0.5% on this year. Perhaps a bit higher than my calculus but a reasonable conclusion.
But then Dr Oliver uses the following to justify a rise in share prices:
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Hmmm…I don’t think so. I agree it is entirely possible that shares will reach new highs next year but let’s not kid ourselves about why. More money printing may well do the job but that does not equal the value that Oliver is aiming to illustrate with the equity/bond yield spread. On price-earnings multiples, the ASX looks very rich already. From Macro Investor:
The ASX200 closed on Friday at 4,336 points, with FARM’s end of calendar year 2012 estimate decreasing slightly, now at 3,779 from 3,827 points, with the end of 2013 estimate also falling on the back of reduced earnings guidance to 4,283 from 4,345 points. The estimates leave no margin of safety with current prices, but reality and price are converging as weak guidance, lack of earnings growth and macroeconomic factors weigh:
Analyst Estimates
FARM uses consensus analyst estimates for the basis of many inputs, with median estimates of earnings growth continuing to slip, and has approach our original calculation from July. Current estimates for CY2013 have fallen again this week to 370 from 371. In past editions of StockTake we cautioned that previous forecast growth – at 391 as recorded at the end of July – was far too optimistic, and we still stand by our original estimate of 369 cents, which is slowly becoming consensus.
The optimism of the analyst community is nevertheless still reflected in the median forecast target price for the index, which has been throttled back slightly to 4,713 from 4,732 points.
Yield Comparison
The net dividend yield for the entire index has slipped slightly to 4.9%, but grossed up – i.e. including franking credits – it sits at 6.6%, double the current 3.03% yield for 10-year government bonds and above the highest domestic term deposit by over 140 basis points (or 1.4%).
The current spread between bonds and dividends still remains near the highest since the GFC low of March 2009:
Price/Earnings Ratio
In terms of other valuation metrics, the daily price/earnings ratio remains at the historically high level of 16.7 times trailing earnings. This is well above the level of the last rally up to 4,400 points, as earnings growth last year was tepid and does indicate the market is well over-valued:
On a longer-term view the monthly ratio is well above its average, even higher than during the 2003-2007 stock market bubble. The monthly PE (price/earnings) ratio remains at a high of 17.4 times trailing earnings (and an even higher 19 times for the All Ordinaries).
That is a market more richly valued than at any time during the mining boom and the prospects for earnings growth are muted.
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Buy and sell strategies still recommend themsleves to me.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
