Are Australian shares expensive?

There are always active fund managers who say shares are expensive. But are they really? And does it even matter?

At the ASX Investor Day’s where we presented over the last month, one of the most common questions we received was “should I wait until markets become cheaper to buy?”.

Our simple answer is that nobody has a crystal ball into what is going to happen over the short and medium term, so trying to time the market is not a useful approach to investing.

There are no shortage of fund managers and market commentators who have been saying shares are expensive for the last decade. Yet, markets have kept rising and proving them wrong. 

Australian shares compared to history

Compared to history, the Australian share market looks quite ‘normally’ priced at the moment based on its ‘earnings multiple’. The market price/earnings multiple (also known as it’s P/E ratio) measures the market index divided by market earnings. It’s a quick and easy way to see how much people are prepared to pay for earnings.

A higher P/E means people are willing to pay more for earnings. That could be because they’re confident in those earnings growing or simply because other alternative investments (like cash or bonds) don’t offer much of a return.

The Australian market is currently near its long term historical average of 15x earnings. By comparison at the peak of the tech boom in 2000 shares were trading as high as 23x. That would translate into a share market that’s 50% higher than today!

Australian share market PE ratio
All Ordinaries Accumulation Index PE Ratio. Source: Stockspot, Market Index.

Even if markets do become expensive, they can stay expensive for a long time. ‘Hoping markets fall’ is not a sensible or repeatable investment strategy.

Our advice is the best time to invest in the market is regularly. That way you benefit from the long term uptrend and have the opportunity to buy more when markets occasionally ‘go on sale’.

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Australian shares compared to other assets

Compared to the income returns of other investments available to Australian investors, Australian shares look fairly attractive at the moment.

  • Cash, term deposits and Australian government bonds only give you a return of 1-2% p.a.
  • Residential property rental yields in major Australian cities aren’t much better at 2.5%-3.5% p.a.
  • Most global share markets are only paying 1-2% in dividend income.

The Australian share market has a relatively attractive dividend yield of 4.2% which increases to over 5% with franking credits. Of all of the investment options out there it actually offers one of the higher income returns an investor can get right now.

In fact the extra dividend return you get from investing in shares compared to the RBA interest rate hasn’t looked better for the last 20 years.

In a world where everyone is searching for assets that generate income of more than zero in the bank, it’s certainly possible that investors will be willing to pay much more for the Australian share market in 5 or 10 years time. Even if company earnings go nowhere.

More than earnings or any other factor, the attractive ‘yield’ of the Australian share market compared to cash has probably been the biggest driver of the market performance this year.

Shares can be expensive relative to history but cheap relative to other asset classes. Neither are relevant for your investing because markets can stay ‘expensive’ or ‘cheap’ for a very, long time.

Focus on what you can control

The longer you stay invested, the more you benefit from company earnings rising over time, which they do. The longer you stay invested, the less the market earnings multiple (P/E) matters.  

Rather than try and time the market which is totally out of your control, we recommend focusing your attention on the 3 areas that are within your control as an investor; the risk you take (through asset allocation and rebalancing), the costs you pay and your own behaviour.

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Founder and CEO

Chris has been vocal in calling out the industry 'Fat Cats' and is known for telling it as it is. He sits on two Advisory Committees for the industry regulator ASIC, and was previously a fund manager at UBS. He holds a Bachelor of Commerce (Accounting/Finance Co-op Scholarship) from UNSW.

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