This note looks at whether shares are expensive or cheap and how they compare to alternatives such as government bonds and Australian bank term deposits.
The key points are as follows:
– Shares are cheap using forward pricing to earnings ratios and when comparing the level of the dividend yield to the bond yield. Thanks to low government bond yields are higher dividend yields, shares should provide a good risk premium over bonds for the decade ahead.
– While Australian bank deposit rates are attractive for risk-averse investors, the 5% plus dividend yield on Australian shares once franking credits are allowed for means that only modest capital growth is required for shares to outperform bank deposits