Apr 14

Is the market cheap?

The above chart is a couple of weeks old now but is showing the market PE ratio to be around 11 (so its probably 12 now). As the chart shows this is a PE ratio that was pretty much the average throughout the 70s and early 80s. Now a PE of 11 is an earnings yield of 9% and if we expect negative growth of say 1% then we’re left with an 8% earnings yield over the next 12 months. With the government bond yield at around 3% is 5% really a sufficient risk premium? With BBB rated corporate bonds with an average credit spread of at least 5% I’m not really sure the current PE ratio really stacks up as attractive given the incredible headwinds Australian companies are facing…many may say the market’s cheap and maybe a PE of 11 (or 12) is cheap…but not yet.

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