FYI | Mar 27 2007
By Chris Shaw
Want to know how quickly the market has shrugged off the correction of a few weeks ago? Commonwealth Bank’s March Quarter Perspectives report shows global markets have managed to finish higher for the March quarter even after allowing for the losses sustained when the Chinese market led other bourses lower late last month.
As measured by the Morgan Stanley Capital Index, global markets have actually risen 2.8% in the first quarter this year and now sit just 1% below the all-time high, which was achieved on February 26th just prior to the Chinese-led correction.
The strength in equities has been a global phenomenon, as 57 of 72 bourses monitored have risen in the first three months of this year, led by Ukraine with a 62% gain and Vietnam with a 42% increase.
Australia has not fared too badly, the market recording a 5.8% gain to be the 24th best performer, in front of other major markets such as Germany’s Dax (up 3.5%) and Japan’s Nikkei (up 1.7%), while the US market has been flat so far and Hong Kong’s Hang Seng Index has lost 1.0%.
Despite the gains markets appear reasonable value, as the bank notes using FactSet data 27 of 48 countries surveyed have P/E (price to earnings) ratios below their historical averages, while 22 of 48 exchanges have P/Es below their average of the last five years.
Such an approach suggests markets in Europe generally, the US, Canada, Japan and Hong Kong remain fair value or even slightly under-priced, as for example the US market’s average P/E of 16.5x is almost 10% below its five-year average of 18.4x. In contrast, China, India, Russia and Brazil appear overvalued on FactSet data, with China’s average P/E currently 57% above its five-year average and 72% above its average of the past ten years.
Again Australia fairs well by comparison, the FactSet data estimating an average P/E for the domestic market of 16x, which is 13% below its five-year average. Using Australian Stock Exchange (ASX) data the average P/E is 13.95x, 12% below its five-year average.
Similarly the Australian dollar has done well, its 2.6% gain since the start of the year placing it as the ninth best performing currency, the Thai Baht taking the title as strongest performer for the quarter. Overall, of 120 currencies monitored, 55 have risen against the US dollar, 33 are unchanged and 32 have fallen in value.
The bank sees a couple of implications from the numbers for currencies and equities. For stocks it implies some caution is required, as the level of Chinese prices is suggestive of further volatility in the months ahead, with prices unlikely to remain at such elevated levels even allowing for a valuation premium given that country’s strong economic growth.
The strength in the Aussie dollar is likely to drive down import prices and as a result inflation, which may help keep the Reserve Bank of Australia (RBA) on the sidelines a little longer in terms of making further changes to official interest rates. While this is a plus for those with mortgages, it doesn’t help businesses generally and particularly those exposed to the export sector, as the stronger currency continues to impact on competitiveness in global terms.