Expensive stocks are getting more expensive

David Cassidy at UBS has a very interesting and thorough research note out highlighting how expensive stocks, or those with a premium price/earnings ratio (PE) over “cheap” stocks, are getting more expensive, widening the gap as investors re-rate and snap up quality at higher prices. This has occurred as earnings growth tapers and disappoints across the board while the ASX200 in general lags in a sideways funk.

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An interesting market dynamic we have been highlighting over recent months is the rise in the Australian market’s P/E dispersion (we calculate this ex-resources) P/E dispersion has been widening since mid-2014 and accelerated
sharply over the last six months. The driver of this widening has been a re-rating of “high P/E” segment of the market while the “low P/E” segment of the market lagged behind then fell in absolute terms following the market peak in April 2015, albeit this de-rating of “value” has begun to reverse very recently:

The rise in P/E dispersion over the last couple of months coincides with a waning of both market performance and earnings growth. The concomitant rerating of “high P/E” stocks during this period makes some sense in that in a “lowgrowth regime” the market will pay a higher premium for growth, particularly what it is perceived to be defensive and sustainable growth, as opposed to cyclical growth.