Money

Issue No. 16 - April/May 2004

Storm Clouds Gathering

by Tony Catt

On the negative side Australia faces the dilemma of the largest year—on year rise in the Australian dollar since it floated, as well as a vulnerable domestic demand/credit cycle. We expect the Australian market to post a 5% capital return, with most of this front loaded into the first half of this year.

Recent Performance

The Australian market has significantly underperformed its regional peers (in local currency) since the beginning of the recent rally. However, the rising A$ has been a boon to overseas investors. In US$ terms, Australian performance compares favourably.

Valuation Looks Good Domestically

On a P/E of around 14.6, Australian equities are not expensive either in an absolute sense, or compared to recent history. Moreover, we think the Australian market is also attractive compared to overvalued bond and residential property markets.

However, versus both world and Asian equities, the valuation argument is less appealing. Furthermore, as lo...

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