Much fear and negative sentiment regarding global stock markets is flying thick & fast at the moment, with cries of “a crash is overdue!” and “stocks are overvalued” being thrown around like ever so much worthless confetti at a tacky wedding.
Despite most of the basis for these statements stemming from soaring stock valuations in certain sectors – particularly in the USA – as a result of all the money printing that’s gone on globally over the past couple of years, people also seem determined to try and apply this directly to the ASX as well.
“Inflation is running too hot”, people declare, and “interest rate rises are imminent”, with the theory that all Aussie stock prices deserve to plummet as soon as the USA and/or Aus central banks decide to pull their finger out.
While it’s a fair point that rate rises are overdue, there are a few things I see wrong with the “rates rise = Australian stock market must tank” equation.
First, it makes the blanket assumption that all companies, in all sectors, across all markets, are as susceptible to interest rate rises as others. This includes businesses that are less reliant and/or currently holding any debt, which is pretty silly.
The tech sector is typically the poster child for a heavy debt-diet, and indeed the US markets are incredibly tech-heavy at the top.
Even a blind person could see that American tech had run too far for too long – especially the Nasdaq and its copious handfuls of companies that had no chance of turning a profit in sight. Or even those making actual profits with earnings ratios well over the 100 mark.
Yet given our index here in ‘Straya is far less reliant on tech, attempting to directly equate the two on a 1:1 basis makes no sense. This is especially true if you take a glance on the valuations of the US vs. the Aussie market on a macro level.
Here’s what some of the current valuations of major global markets look like over the past couple of years using the Shiller P/E Ratio (also known as CAPE Ratio; price divided by earnings averages over 10 years AND incorporating inflation):
Sure, the S&P500 has run hard; by contrast, the Aussie All Ordinaries – which has also run up vs. pre-pandemic prices – is still relatively reasonably-priced. We’re currently around 19-ish; the US is damn near 40.
Here’s a comparison between our markets over a longer time period:
Again: the gap is massive.
It’s especially true if you remove the Aussie tech sector – currently trading at a P/E of around ~37 – from the equation. Not every investment portfolio has to contain tech growth stocks, or be so heavily weighted towards them.
There’s nothing stopping you from ignoring the sector completely, and pivoting a portfolio towards businesses with better fundamentals, even if only temporarily. And again: this doesn’t mean “the whole stock market should crash.”
Even going by Warren Buffet’s famously conservative “Buffet Indicator” metric (essentially, the size of the nation’s share market relative to a country’s GDP), the Aussie market still clocks in on the fringes of “Fairly valued”, at around the ~115% mark at time of writing.
Contrast this with the US markets, and… yeah – one of these things is not like the other:
The good ‘ol US-of-A is currently hovering around ~40% higher than its average over the past 20 years on the Buffet Indicator, and that’s already on top of a period that saw tech have a massive run (and provide great gains for those who took profits, of course).
While it might be easy to point the finger at Australia’s heavy focus on the materials/mining sector as the main reason for our lower valuation multiples, this also isn’t just a simple case.
Much of our materials sector contains numerous speculative exploration/pre-production companies that have not yet earned a single cent and are selling only hopes and dreams (see: lithium boom), or have only started ramping up production. These spec stocks have had a lot of money pumped into them in the hope of big future gains, particularly over the past couple of years.
This compounds to skew the sector’s overall ratio higher than you’d think; however there are still many fundamentally-sound and money-printing miners within the index to invest in.
Even in the US itself, it’s only really the same frothy sector – with its ‘glamorous’ tech platforms & former ‘pandemic darling’ stocks which really needs a major trim:
Of course, many Aussies can still have their investments affected by a correction in the US markets in a roundabout way, courtesy of…
The ETF Effect
With the massive growth in ETF investing since the pandemic hit, and ETFs now being seen as the “default advice” for new investors/those who couldn’t be bothered/don’t believe in individual stock picking, a ton of Aussies now have more exposure to foreign markets – particularly the US.
When you combine the amount of Aussie cash being pumped into ETFs recently…
… with the country allocation breakdowns of some of Australia’s most popular ETFs, including –
VDHG:
DHHF:
and VGS:
… then this is when the over-valued nature of the US market could theoretically be justified in causing some nerves/get people to bail out of the market.
However, isn’t the entire point of ETFs that the ETF Fanclub continually spout, is that you’re supposed to hold for multiple years, weather any downturns in the market, and Dollar Cost Average-in?
Then if so, why the hell is everyone so worried? Can we calm down about parroting the entire Aussie market, or just “stocks” in general, being “overvalued”, and “needing” a crash?
Needlessly spreading bearish sentiment based on something that isn’t really applicable to much of the ASX does nothing but create self-fulfilling prophecy. Yes, global economies are linked, and yes, we’re so tainted by American media / social media here there’s inevitably going to be some bleed through in mixed messaging.
But how about… people just stop putting their money into overvalued companies, and search out those with solid growth, no excess debt, and quality balance sheets for a while instead?
Nah, that would be too hard – it’s much easier to unnecessarily panic 😎.
