S&P/ASX All Ordinaries vs S&P Composite P/E
Thanks to Sean and Darren for providing links to the Australian S&P/ASX All Ordinaries P/E data. A technical trader, Colin Nicholson, generously provides data, from 1974 on, at his site Building Wealth Through Shares.
Click to Enlarge All Charts
So what does the data tell us? Whatever you want to hear! The Australian market has less volatility than the US and is more reasonably priced. The latter is especially true when you consider past growth and returns in the Australian market has been stronger and the Australian market looks more attractive going forward. I’d speculate there is less leverage used in Australian markets. Ideas anyone?
My quick eye ball suggested there was a strong correlation in P/Es up until 1990 and weaker since then. While my stats are completely rusty, I was able to work out the correlation by decade.
S&P/ASX All Ordinaries P/E (PER) correlation to S&P Comp P/E by Decade
| 1970′s | 1980′s | 1990′s | 2000′s | 1974 – 2010 |
|---|---|---|---|---|
| 0.81 | 0.82 | 0.62 | 0.12 | 0.66 |
So the correlation has become a lot weaker. There could be myriad reasons for this, but I though I’d wet some dunny paper and throw it at the ceiling to see if any of it sticks.
- In the nineties the tech boom took hold in the US. Despite wanting to be the smart country, any Australian with a good tech idea heads across the Pacific to the US. There are very few stocks in Australia and they have a small influence on market ratios. (Before I go on I should mention I capped the S&P P/E for the year starting November 2008 at the October 2008 P/E. Due to the falling earnings the P/E on the S&P peaked at 123, which threw out the graph’s scale.)
- During the naughties commodity prices started to rise and the Australian economy jumped on the Asian wagon, this propelled earnings throughout the economy, leading to further breakdown in the correlation of the Australian and US markets.
But wait a minute! The P/E in Australia was actually trending down during the naughties. What’s with that?
First let’s cover some basic P/E ground for the Australian stock market. It is often said the average P/E in Australia is 15. While that is true for the naughties, it’s not for any other period since 1974. Below is a table of the P/Es by decade and overall since 1974.
S&P/ASX All Ordinaries (AORD) P/E (PER) by Decade
| 1970s | 1980s | 1990s | 2000s | 1974 – 2010 |
|---|---|---|---|---|
| 7.52 | 12.46 | 17.01 | 15.43 | 13.73 |
The current P/E on the All Ords is…is what?
Let me digress into the E of P/E for a while.
The reason the P/E was compressing during the naughties was not due to falling stock prices, but because earnings were increasing faster than stock prices. I derived the earnings in this chart from the P/E and closing prices. Why oh why is data on the Australian market so hard to find? It’s ludicrous that the earnings data for the All Ords isn’t freely and easily accessible. Any pointers gratefully received.
Can you see how earnings grew faster than the price? Yes they are strongly correlated, 0.85 according to my figures, but earnings clearly grew faster than the market prices. OK, I’ll make it even easier for you to see, in the next chart I’ve combined price, earnings and the P/E and set all three to a base of 100.
That makes it a lot clearer doesn’t it. Of course with earnings from mining companies rising and becoming a larger part of the E it is no surprise the P/E was falling as the peak earnings of cyclical companies are not worth as much as industrial companies.
It’s way past beer o’clock, so time for me to post this despite no editing and only half constructed thoughts. Let me know what you think, or any ideas this article stirs in you. I plan on editing this article further over the weekend.
The All Ordinaries index is Australia’s market indicator. The index represents the 500 largest companies listed on the Australian Stock Exchange. Market capitalisation is the only eligibility requirement of constituents, as liquidity is not considered, with the exception of foreign domiciled companies. via InvestSmart.com.au Click for full list of All Ords constituents.
For some reason Australian’s refer to the P/E ratio as PER.
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I think you are right that a resources boom causes PE compression but so does inflation. I think the other thing you need to do is plot the 90 day treasury yield. Or calculate the earnings yield on the stocks-90 day treasury yield and plot that rather than the PE.
Great work on using the data to the 1970′s. Most people calculate the average PE since the 90′s and that is only a small slice of data.
What would be really nice is data from the 1920′s-now. That would show 2 inflationary and deflationary periods and would be a better sample size. Unfortunately there is limited data on the ASX (that I am aware of).
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