Are ASX 200 shares overvalued right now?

The S&P/ASX 200 Index (ASX: XJO) rocketed 2.6% higher to close at a four-month high on Tuesday.

That’s good news for investors who have ridden ASX 200 shares higher since the March bear market.

The benchmark Aussie index has now rebounded 35.4% higher since 23 March. That’s been led by some of the biggest companies like Commonwealth Bank of Australia (ASX: CBA) and BHP Group Ltd (ASX: BHP).

But have ASX 200 shares been overbought at their current valuations or is there something else at play?

The argument for why they’re overbought

I think the easiest argument is just to compare where we are now versus the start of the year. 

The benchmark index is back to where it was in early March. A lot has changed since then in terms of economic growth and corporate earnings.

Arguably, the current climate means that most ASX 200 shares are not worth what they were back in March. However, share price valuations tend to say otherwise.

In fact, the JB Hi-Fi Limited (ASX: JBH) share price has climbed 14.6% in 2020. That’s despite difficult conditions for the Aussie retail sector as a result of the pandemic restrictions and significant unemployment.

All of this could indicate that ASX 200 shares have been overbought and are trading above their intrinsic value right now.

But ASX 200 shares could continue to climb

There are a couple of key factors that support ASX 200 shares continuing to climb higher in 2020.

One is the significant government stimulus being deployed right now. The Federal Government has pumped billions of dollars into the economy in the form of JobKeeper, JobSeeker and other initiatives.

According to an article in yesterday’s Australian Financial Review, that trend may continue in 2020. AMP Capital portfolio manager, Dermot Ryan, suggested ‘markets continue to want to trend higher’ despite some challenges facing the Aussie economy.

There’s also been a strong response from central banks around the world. That has helped boost market liquidity and allow companies to fuel growth with cheap borrowing rates.

Also adding to the bullish scenario is the record low-interest rate environment. Even if investors want a lower risk investment, savings account and bond rates are at all-time lows.

That means any spare capital is likely to be directed towards the share market. As a result, ASX 200 shares may continue to push higher due to limited investment options to deploy this additional cash right now.

Foolish takeaway

I’m not sure if ASX 200 shares have been overbought in 2020. However, I’m certainly not willing to bet against the world’s governments and central banks.

Add in the possibility of a quicker than expected economic recovery and I think I’ll keep buying ASX 200 shares in 2020.

More reading

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• Is the Tassal share price a potential outperformer?
• 5 things to watch on the ASX 200 on Wednesday
• ASX 200 jumps 2.6% on vaccine hopes and jobkeeper
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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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