Most stocks on Australian and US stock exchanges are trading well below their pre-GFC valuations, says Vertium Asset Management chief investment officer Jason Teh, who will be speaking at the InvestorDaily Asset Strategy Forum 2017 next week.
In a recent article titled ‘Is the stock market in a bubble’, Mr Teh said there have been no shortage of bear market predictions as the US stock market continues to break pre-GFC and record highs.
“Several commentators have pointed to some well-known US fund managers struggling to match the performance of the US market. If they are finding it difficult, why wouldn’t you think a bear market is imminent?” Mr Teh asked.
With most of the market gains in the US having been driven by technology stocks, some observers are pointing to similarities with the technology bubble in 1999-2000, he said.
The five largest stocks in the S&P500 (namely Facebook, Alphabet, Amazon, Apple and Microsoft, or ‘FAAAM’) have a combined market capitalisation of about US$3 trillion, Mr Teh said.
But with the notable exception of Amazon, the current PE multiples of the top five technology stocks do not suggest a bubble, he said.
“Moreover, the global MSCI tech sector is trading at around 20x, which is a far cry from the tech bubble peak of 50x,” Mr Teh said.
“During the technology bubble, not only were technology stocks dangerously expensive, but they were also cash hungry. Fast forward to today, the FAAAM stocks in the coming year are expected to hold more cash (about $444 billion combined) than the GDP of some countries.”
The valuations of Australia’s largest 10 stocks are similarly valued, Mr Teh said – noting that Wesfarmers, Woolworths and the Commonwealth Bank are all trading at a PE ratio 20 per cent below their pre-GFC peak.
“Bubble or bear market predictions often get a lot of attention, but the canary in the coal mine – valuation multiples – are not yet signalling that we should worry,” Mr Teh said.
“While we do not know where market prices will be in a year’s time, we do know that the starting point helps determine the future outcome: the lower the valuation multiple, the lower the chances of a market correction.”
Vertium Asset Management was launched by former Investors Mutual portfolio manager Jason Teh in July 2017. The boutique’s equity income fund recently received a recommended rating from Lonsec.
To hear more from Jason Teh, register now for the InvestorDaily Asset Strategy Forum 2017 in Sydney on Tuesday, 31 October and in Melbourne on Wednesday, 1 November. Tickets are free for registered financial advisers.
