Value of equity market clouded by IFRS
A leading economist has warned investors not to be misled by the current price earnings (PE) ratios of the Australian equities market, as they cannot be readily judged on face value due to the impact of the newly adopted International Financial Reporting Standards (IFRS).
Commonwealth Securities chief equities economist Craig James said: “The changes in the accounting laws certainly have somewhat inflated earnings over the last 12 months, and therefore depressed things like price earnings ratios.
“It’s very, very hard to work out what the true PE is now because of those accounting rule changes. The PE ratios, the measure of valuation in the market, are still probably on the cheap side, but these sorts of levels are artificially holding down this level of valuation,” he added.
In regard to Australian share market returns, James said he expected them on average to be around the 10 to 15 per cent mark for 2007.
As far as share market sectors are concerned, James encouraged investors to take a more defensive approach to their portfolios and look to include banking and finance equities.
“We also believe in a more balanced approach to the share market at the moment. We think that the mining sector is going to remain firm for a number of months, but is going to tail off over 2007 as growth rates dissipate,” James explained.
In addition, he suggested investors could benefit from revisiting the telecommunications sector in the New Year.
“The surprise packet in 2007 may be a case of in with the old, out with the old. It may be that the ‘tech’ sector makes somewhat of a comeback,” James said.
“We believe the next big thing will be the convergence of technology, media and telecommunications providing those outcomes for consumers; the sorts of things like everyone getting mobile phones with the ability to view television on there. The fact that telcos are going to be looking for media content and looking at places like Fairfax to provide for their phones,” he added.
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