The Australian market continued to drop today, and the chart looks like a bit of investor panic may be afoot. A risk-averse investor will probably look at the chart at envisage a crash down to 4,500 or below - as bad as 87, or worse.
However, as at 31 December the p/e ration of the AllOrds was 13.97, which is quite modest by historic standards. And the drop over the past two weeks means the market p/e is now down to around 13.20. Of course at times like this people get focussed on potential negatives - the US economy going into recession, India and China growth being choked off in an attempt to combat inflation, global commodity prices dropping from their recent highs. If all these things happen then the profitability of Australian companies would be clobbered - financials, retailers, property and mining. If the "e" in the p/e equation drops, then the p/e ratio would be much higher even at the current market level, meaning it isn't really a bargain. However, if reasonable growth continues in the BRIC economies and the US avoids a technical recession the chances are that buying at the current levels is a reasonable bet.
Copyright Enough Wealth 2007