Money

Issue No. 24 - August/September 2005

Is equity getting too expensive?

by Mr Tim Binks

The market has recorded another strong year, returning 26% for fiscal year 2005 compared with a return of 22% in the previous year.

Interestingly, the price to earnings multiple (PE Ratio) premium of our market compared to other global markets has moved to its highest level since the 1980s – we note that the Australian premium is all the more unusual given that our interest rates are so much higher than elsewhere.

After dipping 5% in April, the Australian index has rebounded to reach new record highs as we enter the main corporate reporting season. This means that many companies will need to deliver strong results in order to justify their premium ratings.

One of the main driving forces for equities in June-July was strong liquidity resulting from superannuation inflows, several company buybacks and special dividends as well as the completion of large cash takeovers — i.e. Southcorp Limited, National Foods and WMC Resources Limited.

The relatively high...

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