Today I'll run through where the bargains in the market are at the moment and why this is being called the shopping spree of a lifetime.
The truth is that the market is cheap.
Take a look at the graph below. It's a long-term graph of Price to Earnings (P/E) ratios. P/E ratios are used to gauge whether shares look expensive or cheap by comparing prices to earnings. The theory is that you shouldn't mind paying higher prices as long as you also get higher earnings or profit.
The longer term average P/E ratio for the market is 16.
This graph is the P/E ratio for the All Ordinaries Index from 1972-2009.
You can see that the sharemarket is the cheapest that it has been in decades. If we had a recovery like the one that took place in the 1980s to a conservative P/E ratio of 12 that would mean there'd be a gain of more than 35%. A recovery back to the long-term average of 16 would be a gain of more than 80%.
The truth is that if you believe that the Australian economy will continue to grow, then profits will also come back to growth and we will see more normal prices.
The reason that this is being called the opportunity of a lifetime is because we haven't seen an opportunity like this in almost 30 years and we may have to wait another 30 to see another opportunity quite like it.
So if you are a bargain hunter, the question is: where are the biggest bargains on the market?
The three cheapest sectors are:
All of these sectors have an average P/E ratio of just more than 5 times.
The three most expensive sectors by far are:
Here are all the sectors and the P/E ratios as of the 31st March 2009.
So there it is: the market is looking cheaper than it has in about 30 years. I'm more comfortable investing now then I was a couple of years ago.
Remember, keeping a business mind when the market seems illogical can be great for your bottom line!
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Happy trading!
Julia Lee Equities Analyst Bell Direct
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