"The Australian Share Market is now almost “off the scale” and the Australian Share Market is representing outstanding value in all but the most pessimistic of scenarios.” - Shaw Stockbroking Research.
On any rational measure of valuation, the Australian Share Market is pricing in a very pessimistic outlook for earnings growth coupled with grave fears about credit worthiness.
All Ords 1 Year Trend
All Ords 5 Year Trend
Shaw’s research analyse a “typical” downgrade cycle assuming that the Australian and global economies dip into recession and suggest there may be 10% downgrades to earnings estimates based on previous cycles should this scenario eventuate.
Global bond markets have been driven to “bubble” proportions due to a flight to safety amongst investors, a reluctance to borrow amongst the private sector and ongoing liquidity injections from central banks. Investors should avoid long term government bonds.
Whilst difficult trading conditions are likely to persist for the remainder of calendar 2011 in Australia and industrial earnings per share growth is likely to continue to be revised down, there remains a very robust capital expenditure cycle and strong export markets to buoy the economic outlook.
Unlike many central banks, the Reserve Bank of Australia has plenty of dry powder in terms of lower interest rates to help offset any demand driven weakness in the domestic economy .
Valuations are now almost “off the scale” and the Australian Share Market is representing outstanding value in all but the most pessimistic of scenarios.
Australian Shares look attractive in both an absolute and relative sense. Long-term returns from Shaw's dividend discount model using a 5% terminal growth rate suggest returns in excess of 14% per annum total return. This compares favourably to both short-term interest rates of 4.75% and 10 Year Government Bond rates of 4.1%.
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