We are now in uncharted waters. Historically high PEs, diverging sectors, and Banks paying dividends below term deposits.

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The All-Ordinaries Index is trading on a PE of almost 29, well above the historical mean of 17.5 (click HERE for charts), where the previous high was 23 (ignoring the COVID spike, where revenue dropped off a cliff due to sanctions). 

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Also, The All-Ord Earnings per share has never traded anywhere near its current 3.5% (again ignoring COVID) against a long-term average of 6.7%.

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Just to illustrate this, CBA, arguably our best performing bank, will find it near impossible to justify a PE for 28. Rising defaults and cost pressure on businesses, would suggest earnings growth is tempered. Banks traditionally trade at a discount to industrial stocks due to the nature of their business. CBA has been viewed as an income stock but is now generating a paltry 2.94% p.a. Hardly inspiring when compared to a CBA 1 year term deposit at 4.35%.

 

So why is this happening?

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Perhaps funds are targeting “safer” stocks to invest in as concern about the fragility of the market rises. Over the past year, stocks outside the top 20 in any of the global markets have significantly underperformed the top tier stocks, with a widening imbalance between the higher and lower market caps.

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Also, the performance of finance and Tech sectors contrasts significantly with more cyclical sectors such the Materials sector (down almost 6% for the year) and Energy (-14%). Compare this to Financials (up 40%), Tech (+70%) and Real estate (+25%). One interesting fact is the disparity between consumer staple (+1%) and Consumer Discretionary (+ 31%). Shows how while costs have risen. Staple companies tend to be low margin business where growth is stable. Whereas discretionary get the benefits of a boom and revenues rise. That is what we have now – a boom. And I believe we a are a straw on a camel’s back away from a bust.

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The US and Australia yield curve remain inverted, indicating short term concerns with credit remain. Business is still carrying most of the debt they had when paying 2%. Costs have risen by over 30% over the past 2 years in many cases and try go food shopping with the same budget pre-COVID.

Markets everywhere (including Bitcoin) are setting new highs and doesn’t seem to want to stop. However, after speaking to many businesses, it’s perhaps not so rosy under the hood. it won’t take much of a downturn to see the cards fall.

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We have cashed up a significant holding is our Macro Portfolio and have been defensive for some time. We started selling last year, so in hindsight, we were a tad early, but we remain steadfast in our belief the market is overpriced and is due for a significant correction is coming, and you won’t see it until too late.