Saturday 7 August 2010

The market is climbing from its June low - Australian (ASX 200) stock market plus its PE10 – August 2010 Update

The Australian stock market index, the ASX200, closed on Friday at 4566. This means that since the June average low of 4302 the market has risen by 6% in a little over one month. As of Fridays close the cyclically adjusted PE ratio (ASX200 PE10 or CAPE) has risen from 16.51 in June to 17.36. This can all be clearly seen in my first chart today.

As regular readers will know (and is contained in posts in the right hand side bar) I nominally want to hold 21% of my low charge portfolio in Australian Equities. I have decided that when the PE10 is 16 I will hold this 21% nominal. Otherwise I will use tactical asset allocations meaning if the PE10 is 6 I will hold 27.3% and if it is 26 I will 14.7%. So with today’s CAPE at 17.36 I am targeting a holding of 20.2%.

I am using this method for a couple of reasons. Firstly there is a correlation between the ASX200 Price and the ASX200 CAPE. Today that is 0.79 which is down from 0.80 at my last post. Secondly there is a correlation between the CAPE and the future 1 year return. Today that correlation is -0.39 which is the same as my last post and can be seen in my second chart. Using the trend line of this second chart with an ASX200 CAPE of 17.36 shows an expected 1 year return of 14.4%.

Looking at some key PE10 figures for this month:
- the ASX200 PE10 average for my dataset is 22.7
- the ASX 200 PE10 20 Percentile for my dataset is 17.2
- the ASX 200 PE10 80 Percentile for my dataset is 27.6

My third chart today shows Real (after inflation) Earnings and Real Dividends for the ASX200. Dividends and Earnings still remain below both their trend lines. Of interest though is that over the past few months they have flat lined and one could even suggest that the earnings may even be turning down. Has this recovery all been down to government stimulus the world over and there is no recovery? Will earnings continue to drop remembering the long run Real Earnings for the ASX200 from this dataset is only 210. If that was the case and the Price remained at Friday’s close we would have a PE ratio of 21.7.

As always do your own research.

Assumptions include:
- All historic figures are taken from official data from the Reserve Bank of Australia.
- August 2010 price is the 06 August 2010 market close of 4566.
- August 2010 Earnings and Dividends are assumed to be the same as the July numbers.
- Inflation data from July and August 2010 are estimated.


  1. Really interesting, congratulations on such a good blog.
    I was wondering - since you must have all of the data - is it possible to see a graph for ASX 200 PE10 compared to P/E (or PE1 I guess we could call it)

  2. Hi tk
    Thanks for the compliment.
    I'll try and pull a post together which provides the latest ASX200 data (including the PE1) over the next couple of days.