Market at vulnerable levels but low rates can support high PE's

Market at vulnerable levels but low rates can support high PE's. Certainly on a ten year time frame the current PE does look high. If we were to experience some kind of exogenous shock to the system then the market looks vulnerable at these levels. This obviously makes us uncomfortable. However, on a longer term perspective we can see that in low interest rate environments these kind of multiples can be sustained - when the Reserve Bank is in loosening mode the PE of the market rarely, if ever, falls. So the key outlook then is around interest rates, which we believe will head lower from here and is likely to stay low for some time. In effect, policy makers are buying insurance as they see unemployment rising and mining capex continuing to fall. We do not see the Reserve Bank deviating from the current path until they see the rest of the economy start to kick into gear via higher consumer spending and increased investment as a result of a more competitive Australian dollar.