Australian equity prices surged earlier this year, took a breather, then have recently surged again.
Greg Mankiw links to a (very comprehensive) survey suggesting US equity prices are cheap.
If that is so these RBA graphs suggest Australian equities remain cheap:
- since 1995 Aussie share prices have increased slower than the S&P but generally followed world trends.
- most share price growth has obviously been in the mining sector, other sectors have not done much since 2008 (exclude the banks from this claim)
- trailing and forward p/Es have converged toward world levels
- Aussie dividend yields are consistently higher than those in the rest-of-the-world.
I have long puzzled at the poor performance of the Aussie market since 2008 given the unusually good relative performance of the Australian economy. Mu guess is that the high Aussie dollar coupled with regressive expectations about commodity prices explain a bit of what has been happening. Foreign investors are worried about big capital losses if the dollar collapses as it might. But it is partly a case of focusing selectively on the bad news. My guess is that with the recent interest rate cuts and the likelihood that these will be repeated the Aussi dollar will settle quite a bit lower and our large mineral exporters, while experiencing reduced demands for their products will do OK. Retailers still face difficult times but there will be pressure on the extraordinary rentals they pay and eventually on their labour costs. (Labour costs need to fall in real terms throughout the economy and this adjustment will be a difficult one – with declining terms-of-trade our living standards are reduced). The current lower interest rates could lead to another boom-and-bust bubble through property market stupidities and if so some of the banks will look expensive at current prices. On the latter see also here.