We believe there is a change in equity market leadership that is driving the market higher. We have observed that the stocks of companies with cyclical earnings that have reported better than expected earnings are continuing to be supported by markets and generally trading higher post results. At the other end of the spectrum the companies with full valuations that are already trading on large premiums to the market (and with higher expectations) are trading flat to down post results.
Comparing the Australian market versus the US market, the S&P500 has outperformed the S&P/ASX 300 Accumulation Index by around 18% from pre COVID levels. The US market has rebounded more strongly from COVID related lows on the back of a higher proportion of the market in growth companies (Tech and Healthcare 43% of market cap vs Australia at 14.2% of market cap) as well as recording FY21 earnings growth of 43.8% versus Australian at 25.7%. Looking ahead, market expectations for the S&P500 are at +9.5% earnings growth in FY22 versus Australia at +20.5% earnings growth. Coupled with the Australian market PE at 16.1x (NTM) and the US PE at 21.7x (NTM) and the Australian market having a greater proportion of cyclicals, Australian equities look relatively good value, in our view.
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