Waiting on Earnings Growth
Since June 2012, the ASX 200 Index has risen from a low of 4,000 points to the current 4,500, despite the deteriorating global growth outlook. In a research paper from the Strategist at Deutsche Bank, Tim Baker points out this 12.5% rally is based on a 20% expansion in the Australian prospective PE ratio from 10.7X to 12.8X over this period. In fact forecast earnings over this period has declined by 8% while the Resource Sector has recorded a 23% decline in its forecast earnings. The ratio of downgrades to upgrades is running at 2 to 1. Despite brokers using the Earnings Yield (7.8%) to Bond Yield (3.0%) Gap (4.8%) as an argument to buy the market, earnings growth will need to come through at some stage for the rally to continue.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Dennis Bergmans
:
It seems to me that as interest rates have fallen, share prices for the so called ASX stalwarts have risen despite no real change in fundamentals. Where does the term deposit money go? In my opinion, to the “bluechips”. As an overall weighting, what companies make up the ASX200? The “bluechips”. Banks, Telstra, BHP etc. While I would not invest in Telstra in a fit, I can understand why people find the dividend attractive.
A rational investor, such as yourself Roger, would say earnings needs to improve among other things. Mr Market is not rational.
Roger Montgomery
:
yes I would Dennis.
Steve Wood
:
Australia has a 10 year PE ratio that is in the middle of the pack relative to other countries.
Furthermore, compared to its own historical ratio, Australia is moderately to value priced.
This indicator has historically been a good forecaster of future market returns. For Australia that quite possibly means decent (relative) returns – over the next 5+ years.
Whereas incidentally, US looks expensive.
zoran arnautovic
:
Hi David,
If Montgomery investments are 70% and more in cash( like Roger likes to point out) what does “missing” on 12.5% rise do to your bottom line?
Roger Montgomery
:
Hi Zoran,
We haven’t been 70% cash for a long time. Your reference to what we “like to point out” needs updating.
Greg McLennan
:
G’day Zoran,
The Montgomery Fund since inception on 17th August to 17th October is up 9.19%. Over the same time period, the ASX 300 is up 4.95%. I don’t think they’re missing out on much.