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Sunday, 9 February 2020

Brave forecasts

Brave call

The Reserve Bank chose to sit pat with its upbeat growth and unemployment forecasts, despite the steadily gathering evidence that the coronavirus is becoming a potentially serious international problem:

Source: Westpac

Very courageous, in the spirit of Yes, Minister!

Wall of worry

A bit of Sunday stocks chat (not advice).

Upon the release of the Royal Commission report, I picked up some Mortgage Choice and AFG shares (since disposed).

I also took the opportunity to pick up some Commonwealth Bank shares during 'peak fear' when the price was floundering in the high $60s.

Although the outlook for the housing market has picked up strongly, the majors' market share of mortgage is now stuck at the lowest level since 2007, with other regulatory challenges ahead.

AFG reported that the majority of investor loans in the September 2019 quarter went to non-major lenders for the first time.

And a record 36 per cent of first homebuyers - normally strong supporters of the major banks - sought loans elsewhere. 

Yet the CBA share price has soared, taking the market cap to beyond $150 billion, representing a record high PE of 18.

Despite a benign outlook for earnings growth, many Aussie shares are becoming very expensive on a range of metrics and measures. 

Marcus Padley ran some germane numbers on his Marcus Today mailout a little over a week ago:

Source: Marcus Padley

Punchy, indeed!

And, meanwhile, here's the US, with valuations now more than 3 standard deviations from their geometric mean (approximately 150 per cent above the long-run average, depending upon your preferred measure):

Source: Advisor Perspectives

There's little point wasting time and energy trying to 'call' the top, or predicting what happens next, except to note that expected returns from these price levels are inevitably modest, even if earnings yields do still look attractive compared to bond yields.

Proceed with caution :-)

Not advice, of course. 


Housing finance may be the most interesting data release this week, as markets absorb the gathering China risks.