CHARTS: Why Australian stocks could be more at risk of a sell off than other markets

Image: Ian Walton/Getty Images.

The Australian stock market is under pressure today as shares slide and the ASX 200 index dips back under 5500 again down more than 1% at 5457.

That fall appears to be a result of the combined weight of big names like Aurizon, Wesfarmers and Woodside going ex-dividend, adding to worries about Fed signals at Jackson Hole that it may hike rates twice this year to weigh on sentiment.

But there is every chance, as reporting season wraps up this week, that the ASX could be more vulnerable than most overseas markets if worries about the Fed morph into stock market weakness. That’s because of the elevated level of the local markets PE ratio’s relative to the rest of the world.

Writing in their Australian Equity Strategy update last Friday, Deutsche Bank strategist Tim Baker and research associate Joseph Kim said:

Even with a fairly good reporting season, the equity market has underperformed global peers. This follows outperformance in USD terms from late 2015. The underperformance may reflect a realization that:

    1. Australia’s PE ratio is a little high after the outperformance we’ve seen (see figure 4).

    2. While earnings aren’t being cut a lot, expected growth isn’t that great. (At this time of year, earnings growth forecasts are typically over 10%, but for FY17 the forecast is only 5%).

Of course a market can stay relatively expensive if traders perceive that overvaluation will be remedied through times by higher earnings. But Baker and Kim say it’s been “bad half for earnings [with] falls across the major sectors”.

“Market earnings growth remains in negative territory (June half -6% yoy). But now it’s not only resources dragging down the aggregate” the pair said.

It adds up to a vulnerable market if the outlook for global stocks sours.

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