FNArena’s Weekly Insights – July 20 2020
Dear time-poor investor: are share markets egregiously overvalued? Is Biden as President a problem? Can Telstra create value through structural separation?
In this week’s Weekly Insights:
-Forecasts, Not Valuations
-Is Biden A problem?
-Telstra, There Is Another Way
Forecasts, Not Valuations
By Rudi Filapek-Vandyck, Editor FNArena
Once again it has become a popular opinion that share markets are pricing in too much exuberance in light of what the economic recovery story can possibly deliver.
One way to illustrate this year’s euphoria-gripped markets is by measuring the average Price-Earnings (PE) ratio and concluding this year’s swift recovery is off the charts, with PE ratios higher than at any other time in history, beating 1929, 1987, 2000 and 2007.
But is this really the most accurate measure available? Is it even appropriate to guide our views about the status and prospects for equities today?
I beg to differ.
Apples Versus Oranges
Let’s start with the most obvious observation: comparing today’s index valuation with history is not comparing apples with apples.
Indices change because their composition changes. Back in 1987, the two most important constituents of the ASX200 today -CSL ((CSL)) and CommBank ((CBA))- weren’t even listed yet.
In fact, there was no ASX200. All we can compare with is the All Ordinaries, and that index looked a lot different from its successors today.
Back in 2000 the most important index movers were two listed shares in News Corp. By late 2007, resources were trending towards peak index weight.
In 2020, the largest index constituent is CSL and it always trades at a premium versus the broader market. In depth analysis by analysts at UBS earlier in the year established that having CSL as the top index weight in Australia adds around 100 basis points to the average PE for the ASX200.
News Corp doesn’t even feature anymore…..