Five offshore influences that may hold sway on local equities
Eley Griffiths Group calculates the local market’s equity risk premium each quarter. At present it sits at 6.35%, slightly more attractive than the June quarter setting. The Australian sharemarket continues to offer equity investors ample reward for the extra risk over bond returns. Local equities are a BUY at current levels. The relative outperformance of the XSO versus the ASX 100 looks set to continue, if EGG’s interpretation of current PE differentials holds true. At the time of writing, the FY16 PE ratios of small and big caps were at parity at ~ 14.8x. History has taught this manager a thing or two and one dyed- in-the-wool rule is that the market doesn’t buy small caps at sizable (15-20%) discounts to big caps. Counter intuitively, investors buy small caps at PER parity and continue this until a full blown premium differential is in place. This process can play out over a lengthy period and we may just be at the early stages of this phenomenon. Read our quarterly report including five influences that may impact local equities into 2016.
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