Price Earnings Value of ASX 200

I came along a set of interesting numbers which I have put into a graph below. These numbers reflect the ASX 200 (which comprises of the top 200 shares on the ASX) price to earnings for the past 5 years.

Looking at the graph you can see that this is in a steady downtrend.

This would suggest to those viewing it that the current bull market run of 3 years is not overextended. If you were viewing this data without knowing how the market has performed you would probably assume the market has dropped or remained steady.

So why has the avg P/E ratio dropped ?

My speculation is the resource boom has caused dramatic increases in some of our major companies such as Woodside Petroleum Ltd (ASX:WPL), BHP Billiton Ltd (ASX:BHP), and Rio Tinto Limited (ASX:RIO). Along with this banks such as National Australia Bank (ASX:NAB), Commonwealth bank (ASX:CBA), Westpac Banking (ASX:WBC) and ANZ Banking (ASX:ANZ) have continued to increase the profits to record levels. The stock market rising has also boost the fees chargeable for financial firms such as AMP Limited (ASX:AMP) and Etrade (ASX:ETR). This flows through to other sectors which support these companies such as IRESS Technologies (ASX:IRE).

Another reason could be that there are a record number of Listed Property Trusts (LPTs) in the ASX 200. This companies historically have lower Price to Earnings ratios and higher dividend yields.

Is the Market Overheated ?

To determine if the market is overheated I started to look at the sector breakdown and found some interesting statistics. Of the ten sectors that make up the index, 70% (7 out of 10) were showing Price to Earning ratios of 20 or more. The average is 16.5 so a ratio of 20 shows that sector is around 20% overpriced. The only three sectors not overpriced were financials, Materials and Telecommunications.

I wrote this article to show that all statistics on the market are not equal. If I broke this down further I would be able to specifically pick out stocks which are over priced in each sector. I would also be able to highlight which companies in each sector are currently showing value and could be a potential takeover target or are set for a turnaround.

So to answer the question on whether the market is overheated : YES !!!!

70 % of the market is running at historically high price to earnings and there is only two ways for this to remedy itself. The first is the prices retract to the historical mean which is around 15-16 for the ASX 200 or companies produce dramatic earnings increases in the future to justify the high price to earnings of today.

Good Luck Investing.

Now there is an iPod Index .. No Joke

A new index has been created by CommSec. The index announced is called the "iPod Index". It has been created as another way of measuring purchasing power parities. The light-hearted index follows in the footsteps of the Big Mac Index which was introduced in 1986. According to the iPod Index, there is a chance that the Australian dollar may fall by 15% against the US dollar. No currency model is perfect, but the iPod Index has a distinct advantage over the Big Mac Index in that iPods are almost all made at a single point in China, whereas Big Macs are assembled on-site. Other than the variable of transport costs, the iPod may prove to be the more accurate index. For the record, Brazil has the dearest iPods and Canada has the cheapest.

CommSec is owned by the Commonwealth Bank of Austrlaia Ltd (ASX:CBA).

Good Luck Investing.

Shareholder Incentive Schemes

There is an intersting article in the Age today on shareholder incentive schemes ( also known as shareholder benefit schemes). Discount and benefit schemes encourage new investors in the companies concerned, whilst maintaining loyalty and support from existing shareholders.

Coles Group Limited (ASX:CGJ) had the best known incentive scheme a while back with the Coles Myer discount card but that was elimiated in 2002 due to a lack on instituional support.

Banks such as St George Banking Limited (ASX:SGB) and Commonwealth Bank Limited (ASX:CBA) do not offer specific shareholder incentives but loyalty programs exist for the ANZ Banking Limited (ASX:ANZ), Westpac Banking Limited (ASX:WBC), National Australia Bank Limited (ASX:NAB) and Bank of Queensland Limited (ASX:BOQ).

The ANZ Bank has revealed that it is evaluating its shareholder incentives at the moment.

One of the best incventive schemes I could find a few years ago was Club Crocodile Holdings Ltd. This is now named Ocean Capital Limited (ASX:OCE) . It use to be investors with a minimum 15,000 shares were entitled to five free nights per year for two at either of the company’s two Whitsunday resorts. However while the Shareholder accommodation discounts at the properties remain a benefit to shareholders the format is now different. Shareholders now recieve a discounted standby rate of the property without the restrictions normally applied to standby rates. This benefit is available to all shareholders irrespective of the number of shares held.

The only list I can find available is rather old (1999). It is available here.

I will try and create an updated list myself if I get some time.

Good Luck Investing.