Sunday, 19 December 2010

The ASX 200 cyclically adjusted PE ratio (ASX 200 CAPE or ASX200 PE10) – December 2010 Update

The Australian ASX200 is currently 4763. Let’s look at the usual monthly indicators that I monitor every month for this index. My first chart shows the cyclically adjusted PE ratio (ASX200 PE10 or CAPE) at 17.8 which is up from 17.2 last month. The P/E ratio on the other hand heads in the opposite direction, heading downwards from 18.6 to 16.4.

My second chart shows the relationship between the ASX 200 PE10 and the 1 year real return that can be expected. The correlation is -0.37 which is why I use the PE10 as a metric for the tactical portion of my asset allocation. If you’re interested in how my Retirement Investing Strategy was built then start here.  Using the trend line of this second chart with an ASX200 CAPE of 17.8 shows an expected 1 year real (after inflation) return of 13.3%.

Some further data that may be of interest is that the correlation between the ASX200 Price and the ASX200 CAPE today sits at 0.77.

Looking at some additional key PE10 figures for this month:
- the ASX200 PE10 average for my dataset is 22.6
- 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 are at 194.4 which is still below the long run trend line. Earnings on the other hand at 279.5 are now slightly above the long run trend.

Looking a little more closely at my own portfolio, the increase in the ASX 200 PE10 necessitates a reduction in my asset allocation from my Australian Equities portion of my portfolio. I have decided that when the PE10 is 16 I will hold a nominal 20.5%. Otherwise I will pro-rata the holding based on the rules that if the PE10 is 6 I will hold 27.3% and if it is 26 I will 14.7%. Money not in the ASX 200 will be held in cash for quick deployment if necessary. So with today’s CAPE at 17.8 I am targeting a holding of 19.3%. Today I find myself a little over this target at 20.0% however not far enough that a rebalance is warranted.

As always do your own research.

Assumptions include:
- All historic figures are taken from official data from the Reserve Bank of Australia.
- Latest P/E ratio is the November 2010 ratio taken from the RBA official data
- December 2010 price is the 17 December 2010 market close of 4763.
- December 2010 Earnings and Dividends are assumed to be the same as the November numbers.
- Inflation data from October, November and December 2010 are extrapolated.


  1. why have the posts stopped? encoree! encore!

  2. Hi Richard (and all readers of Retirement Investing Today)

    Unfortunately the last few months have resulted in a lot of personal life upheaval. This is taking all my focus at the moment. I'm hoping this will be solved very soon and then the posts should start again.


  3. best of luck and hear from you on your return...