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1 August 2019

Bob Cunneen, Senior Economist and Portfolio Specialist


Source: Datastream and Institutional Brokers' Estimate System (I/B/E/S).


Australia’s share market has reached new record highs (blue line), surpassing the previous peak of November 2007. A strong surge in global share markets, falling bond yields and the Reserve Bank of Australia cutting the cash interest rate to only 1%, have been the tailwinds behind this buoyant Australian share performance in 2019.

The key question is whether Australian shares have further upside potential for 2019 or are they overvalued? A simple share valuation measure is the Forward Price to Earnings (P/E) ratio. This compares the current share market price to the expected corporate earnings results in one year’s time. Essentially, how many dollars you are paying now for one dollar of earnings next year. The old adage ‘to buy low and sell high’ applies to the Forward P/E ratio. The Australian share market was expensive at the previous peak in November 2007 with a Forward P/E ratio of 16.5, and this proved a wise time to sell (red line).

Australian shares currently have a Forward P/E of 16.3, which is well above the past decade’s average of 14.4. This would suggest investors have great expectations already. Admittedly, future Australian corporate earnings results could come in even better than expected, allowing shares to make further strong gains over the next year. However this is a bold call given these great expectations are in sharp contrast to the current hard times in the Australian housing market and retail sector.


Important information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies (“NAB Group”), 105–153 Miller Street, North Sydney 2060. An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. This information is directed to and prepared for Australian residents only. MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.