Wry & Dry

May market blooms turn to June ruins. Well not quite.

A quick squiz* at the FYTD chart (purloined from this week's Investment Matters, click the link at the bottom of the page for more erudite investment material from W&D's colleagues) shows how the Australian share-market has risen in almost a straight line since the end of February.

May June market

It looks like the market (including dividends) is not going to give much more than a 5% return this FY.  If that.

But that doesn't worry W&D.  Like W&D's cricket team, markets have good years and poor years.  The problem with this rally is that it has come with more-or-less flat profit-growth expectations.

So, thinking about that most useful of thermometers** of whether a share-market is over- or under-valued, the P/E ratio, if P (Price) goes up and E (Earnings, or profits) are flat or go down, then P/E must rise.

A rising P/E informs that share prices are rising faster than that justified by rising profits. 

Readers will know that when a P/E rises much above its long-term average, a warning for investors is broadcast on the ABC as a community service announcement.  Just kidding.  Such a warning is not necessary, as every investor knows that this a time when investing is no longer easy.

Market pe too high

W&D is not suggesting that the Australian share-market is about to collapse.  It might if interest rates rose, but such a rise is most unlikely, especially after this week's decision by the Chief Teller of the RBA to leave interest rates unchanged.

And as that most astute market observer, Doug Turek pointed out this week, if you remove banks and resource companies from the market P/E, then the P/E of the ASX is over 20!

Investors are now in a definite caveat emptor period.  And in fact have been in one for over 12 months now.

* i.e. quick look at (Australian slang).

** Yes, yes.  It is a mixed metaphor.  Or, more accurately, an incorrect metaphor.