Since simultaneously getting back into the blogging world and sorting my Retirement Investing Today strategy I have already looked at the valuation of the UK Equities market (proxy FTSE100 CAPE) where I personally hold 16.8% of my net worth. Today it’s time to value the Australian Equities market (proxy ASX200 CAPE) where I currently hold 18.9% of my net worth.
As of the close on the 12 May 2011 the ASX200 stood at 4696. Based on this price the first chart today shows the cyclically adjusted PE (ASX200 PE10 or CAPE) at 16.6 which is well down from the 17.8 when I last ran the numbers back in December. The long run average since 1993 is 22.5. Is this implying the ASX200 is undervalued by 26%? I’m not sure but what it is saying is that my target tactical allocation is now 20.2%. If you’re interested in how my strategy was built then a good place to start is here. There is also a lot of information in the sidebar links. The CAPE value is also not far from April’s PE value of 17.
As always my 2nd chart shows the ASX 200 PE10 versus the 1 year real return that can be expected. The correlation is currently -0.36 which is one of the main reasons I use the ASX200 PE10 as a metric for the tactical portion of my asset allocation. It suggests over the long term I might be able to squeeze a small amount of extra performance from my portfolio. Using the trend line of this second chart with an ASX200 CAPE of 16.6 shows an expected 1 year real (after inflation) return of 14.3%.
Additional CAPE/PE10 data for this month includes:
- the correlation between the ASX200 Price and the ASX200 CAPE is currently 0.75.
- the ASX200 PE10 average for my dataset as mentioned above is 22.5
- the ASX 200 PE10 20 Percentile for my dataset is 17.2
- the ASX 200 PE10 80 Percentile for my dataset is 27.6
Today’s 3rd chart today shows Real (after inflation) Earnings and Real Dividends for the ASX200. Dividends are at 196.3 which is still below the long term trendline. Earnings on the other hand are now just about on trend at 283.7. Why are companies hanging on to all their earnings? Have they learnt lessons from the last downturn and want to be prepared for the next one or can they see the next downturn approaching?
As always do your own research.
- -All historic figures are taken from official data from the Reserve Bank of Australia.
- -Latest P/E ratio is the April 2011 ratio taken from the RBA official data
- -May 2010 price is the 12 May 2011 market close of 4696.
- -May 2011 Earnings and Dividends are assumed to be the same as the April numbers.
- -Inflation data from April and May 2011 are extrapolated.