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Tuesday, 09 July 2013 16:57

Is the Australian Sharemarket Cheap or Expensive

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The Australian share market has experienced a strong rally over the past 12 months, although it must be said that this rally was off a low base.

So the question that all investors want to know - "Is the share market expensive now?"

One way of determining this is to consider the Equity Risk Premium.  Equity Risk Premium by definition is "The excess return that an individual stock or the overall stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of the equity market. The size of the premium will vary as the risk in a particular stock, or in the stock market as a whole, changes; high-risk investments are compensated with a higher premium."

Below is a chart that shows the history of the Equity Risk Premium in Australia and basically this shows that the higher the risk premium, the better value the market.  Or in other words when the graph is above the "average" line the market can be considered to offer better value compared to when the equity risk premium is below average.

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This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Read 1179 times Last modified on Tuesday, 09 July 2013 16:57
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