David Bassanese of the AFR diverts attention to stocks today for a change, noting that financial repression has also stretched stock valuations:
The S&P/ASX 200 index rose by 8.7 per cent in the September quarter, easily surpassing the 3.8 per cent gain in the RP-Data Rismark home value index.
…I’m starting to fear the market won’t push a lot higher any time soon – and more messy sideways action around current levels may be in store over the next few quarters. Chances are we can hold above the 5000 level, but will be hard pressed to break above the 5500 level.
…Indeed, all of the market’s gain last quarter reflected a lift in the so-called price to forward-earnings ratio, from 12.9 to 14.5 – which is almost 8 per cent above its decade average of 13.5, and compares with a recent quarterly low of 10.7 in June last year. Over the past decade, the market has ended a quarter at a PE ratio of more than 14.5 only 30 per cent of the time, with a peak ratio of 16.3 in September 2009.
…As it stands, if analysts’ current expectations are right, forward earnings should still rise by a modest 5.4 per cent by June 2014, and by 8.2 per cent in the year to June 2015. But even if earnings are not revised lower – which seems unlikely – there’s not much upside from forward earnings over the next few months at least.
I will add that most of the uplift has been from revising earnings around a falling dollar, which Sydney property speculators have now sadly stabilised, so there are reasonable chances of further earnings downgrades the longer the currency stays in the 90’s. This will be made worse by the lingering discussions of Fed tapering.
In short, for the medium term I agree Mr Bassanese, though in the short term I stand by the call that Republican lunacy is a trading opportunity, boosted by likely delays to the taper.
