Goldman Sachs has recently produced a report on where the fair value of the ASX lies. The market is currently trading at 14.5x P/E, which is in line with its 20-year average based on bottom up consensus EPS for FY14. On traditional valuation models, the average upside is 8%, but the bank is cautious about structurally lower EPS growth and supportive yields based on record-high payout ratios. A fair-value model based on macroeconomic settings finds 12% downside to a fair value P/E ratio of 13.1x. The model considers factors such as falls in short-term interest rates, a high Australian dollar and low long-term bond rates. A historical comparison by sector finds that 60% of sectors are overvalued on a 10-year average P/E, increasing to 90% when the macroeconomic settings are factored in. Goldman finds that Retail, Banks and Media are the most expensive whilst Energy and Metals are undervalued. (VIEW LINK)
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