The other bubble
Published in the Herald Sun (Melbourne), October 2013 by Karina Barrymore
With investors regaining their nerve as memories of the financial crisis fade, there is growing concern about a bubble forming over the share market.
As returns on bonds and cash deposits fall and with renewed enthusiasm for a rising share market, analysts expect an increase in money flowing out of bank accounts and superannuation funds and back in to the share market.
But, as with property, will these extra buyers push stock prices above their true value, creating an over- inflated market?
Or are the price rises justified? With Reserve Bank governor Glenn Stevens and his board cutting interest rates to historic lows, demand for both shares and property is growing.
Australian Stock Report senior equities analyst Benny Sada says there are two keys to pinpointing a share bubble; gauging the market as a whole and looking at individual stocks.
Mr. Sada says while there are several individual stocks heading in to bubble territory, the Australian share market is still on safe ground.
"The market itself is nowhere near bubble territory.
The last bubble formed in late 2007, pre the global financial crisis," he says."
Among the signs we look for are things like a big growth in margin lending." At the moment margin lending is still down by about 50 per cent compared with late 2009.
So it is definitely not credit that is fuelling the current market".
The analyst also looks at price -to- earnings ratios, or PE ratios, and dividend yields.
The PE ratio measures the price of a share compared with the company's profitability.
The dividend yield measures the share price compared with the amount the company pays out in dividends." Just before the GFC the market - wide forward PE ratio was 17.
Currently it is just 14.8,"Mr Sada says."
Ideally you want to see the PE ratio falling and the dividend yield increasing.
And that's what we have." The forward dividend yield pre -GFC was about 3.5per cent now it's about 4.6 percent which represented a market that is fair value at the moment."
The price of individual stocks can get out of whack, he says.
"Cochlear is overvalued in our opinion.
It is too inflated given its growth prospects and issues about product concerns and market share," Mr. Sada says.
"Invocare, a funeral home operator, is another one. It is trading at almost 30 times earnings."
A spokesman for fund manager Wealth Within, says the 76 per cent rise in the All Ordinaries Index since 2009 is justified.
However, low interest rates may be tempting more investors to look to the share market and cause more price rises."
The Australian economy is placed within the perfect environment for a strong share market rise," Mr Sterling says."
There is no sign of rampant speculation in either the share or property markets right now.
We see the current rises in both markets as something that is sustainable for the foreseeable future." However, people relying on savings have had their incomes almost halved in the past three years as interest rates have steadily fallen."
Naturally this forces investors to search for a higher return with the share market one of the favoured mediums," Mr. Sterling says.
"The big four banks are more than likely heading towards the top of their cycle.
Banks are 50 percent owned by mum and dad investors who have piled in due to low interest rates," he says.
AMP Capital chief economist and investment strategist Shane Oliver says the Australian share market is "miles away" from a bubble and notes it is still 25 per cent below its highest peak."
Yes, the market has done well over the past couple of years but that has come after a50 -odd per cent fall through the GFC," Dr. Oliver says.
"Yes, the flows in to the market have picked up but that's because we're coming from quite a low level.
There is money coming back in to the share market but that's after many years of money going out of the share market."
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