MB Members Report: Gerard Minack on the great ASX lag

Australian equities are not expensive by global standards. However, the key investment issue is earnings, not valuation: profits increased sharply through the resource boom, and remain high in domestic sectors. If profits normalise, Australian equities will likely under-perform.

The valuation of Australian equities is mid-range amongst global markets (although most markets do not appear cheap). Valuation is at, or a little above, the historical average (Exhibit 1).

However, if history repeats, Australian equities may under-perform global equities over the medium term. There is a long-standing correlation between relative equity performance and Australia’s terms of trade (export prices to import prices – Exhibit 2).

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About the author

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.