Australian share valuations ‘overstretched’
Brian Thomas
Australian share valuations are “starting to look overstretched”, and investors should consider rebalancing their portfolios, according to Perennial Investment Partners head of retail Brian Thomas.
A fall in the equity risk premium measure, as reflected in Perennial’s monthly Investors Index to the end of May, suggests the market is “not pricing in enough risk at current (Australian equities) valuations”, he said.
“While this scenario is not enough for Perennial to de-weight Aussie equities in our diversified funds, it’s a timely reminder for investors to ask themselves whether they are happy with the level of risk they are taking in their portfolios.”
The equity risk premium is used in Perennial’s Investors Index as a measure to capture the extra return over a risk free rate that investors need to take on the risks of investing in the Australian share market.
Thomas also cautions that investors could be taking on “unintended risk” in their portfolios because of the recent growth of the Australian share market.
“Say you were comfortable with a portfolio of 70 per cent domestic equities and 30 per cent Australian fixed interest five years ago, but have not rebalanced since then.
“You’d (currently) find yourself with an 80 per cent exposure to shares due to the share market growth over the last five years.”
Thomas’ comments were made against the backdrop of an Investors Index finding that the “feel-good times” for retail investors continued unabated in May.
It found the average growth investor earned 2.23 per cent for the month of May and 18.86 per cent for the year, after allowing for fees.
On a 12-month basis, it has been the year of property, with the index finding both local and international property both (coincidently) returning around 41 per cent.
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