An economist has revealed some figures that are food for thought for retail investors trying to figure out whether ASX shares are in a bubble.
Predictions for 2021 have been polarised, to say the least.
Many experts are optimistic, citing near-zero interest rates, COVID-19 government support and coronavirus vaccines to charge up the economy.
“I think in 2021 we will see our equity market deliver at least 10% return,” said Tribeca Investment Partners portfolio manager Jun Bei Liu last month at a GSFM briefing.
“A big part of that will be dividends – however, we should see some of the best growth yet.”
Commonwealth Bank of Australia (ASX: CBA) chief economist Stephen Halmarick at the end of December said that Australia had done a fantastic job of controlling the virus.
“We do expect a solid recovery in 2021, with global growth forecasts at 5.2 per cent – led by the US and China.”
In the opposite camp are wise owls like GMO founder Jeremy Grantham, who is warning of a massive share market bubble about to pop soon.
“Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history – right along with the South Sea bubble, 1929, and 2000,” he said to clients last month.
“And here we are again, waiting for the last dance and, eventually, for the music to stop.”
Now BetaShares chief economist David Bassanese has come up with some numbers to support the bull case.
2021 will see an earnings-driven rally
Bassanese has seen that in January the S&P/ASX 200 Index (ASX: XJO) only rose by 0.3% even though an impressive 6.4% growth in forward earnings was recorded.
“This meant the PE ratio edged back further to 19.2, from a recent month-end peak of 21.8 at end-August.”
He thus predicts the ASX 200 will head up 6% from 31 January to the end of the year, which means hitting the 7,000-point barrier.
“Current market expectations imply 6% growth in forward earnings by year-end, though there appears scope for further upgrades due to the faster than generally expected turnaround in the economy.”
Bassanese’s view was supported further this week when the Reserve Bank emphasised that it couldn’t see the cash rate increasing until 2024.
ASX shares, with a 3.1% loss, had also underperformed compared to other regions over the last 12 months. The S&P 500 Index (SP: .INX)and the Nikkei 225 Index (NIKKEI: NI225) were up 17.2% and 21.5% respectively over the same period.
This means the local bourse, heavily dominated by finance and mining, may be ready to ride the recovery train into the sunset.
“With bond yields only expected to rise modestly further, and the earnings-to-bond yield gap close to recent averages at around 4%, PE valuations may not need to correct back all that much over the coming year.”
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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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