From Goldman:
Four of the five long-run models we monitor now point to significant valuation upside for the ASX 200.
1) The Schiller P/E (Price / 10-year average real EPS) is the most bullish indicator, pointing to 28% upside on the current market price (EPS is in-line with its 10-yr average, c.20% below the 2007 peak).
2) The Earnings Yield / Bond Yield relationship also points to over 20% upside given a 4% gap between the current earnings yield (6.7%) and the 10-year bond rate (2.7%) vs a 20-year average differential of only 1.6% (this model assumes the gap will close by equal moves in bond yields up/equity yields down).
3) Dividend yields are also above their 20-year average (5% vs 4.4%) and while this is largely a function of elevated (and in our view unsustainable) yields on resource stocks (6.2% yield vs a 20-year average of 3%), yields on the banks and industrial stocks are now also slightly above long-run levels.
4) While the current ROE on the index (11.8%) sits 2% below the 20-year average, the market’s P/B (1.75x) has moved down more sharply and their long-run relationship now suggests 13% valuation upside at current levels. The forward P/E on the ASX 200 is the only measure that is still slightly elevated vs its 20-year history (14.8x is 2% above the 20-year average).
Well, that’s one way to look at it. The other is that the ASX is being de-rated globally, quite rightly, as the economic model that underpins it – holes for income, houses for leveraged wealth – falls apart.
