Buffett Indicator: Australia Stock Market Valuations and Expected Future Returns

Country: Australia (updated daily) check out Global Overview for detailed methodology.

According to the original Buffet Indicator, the Stock Market is Modestly Overvalued.

Ratio of total market cap over GDP: Recent 20 Year Maximum - 154.19%; Recent 20 Year Minimum - 74.72%; current - 123.4%
Expected future annual return: 3.5%

Based on the newly introduced total market cap over GDP plus Total Assets of Central Bank ratio, the Stock Market is Fair valued.

Ratio of total market cap over GDP plus Total Assets of Central Bank: Recent 20 Year Maximum - 141.38%; Recent 20 Year Minimum - 68.12%; current - 94.71%
Modified expected future annual return: 5.7%

ETF Used for dividend yield: EWA (Yield=2.71%)
Market Index used: S&P/ASX 200
Current Annual GDP: $1,409 billion US dollars or 1,939 in billions of national currency (GDP in Local Current Prices Annual Growth=2.82%)
Current Total Asset of Central Bank: $427 billion US dollars or 587 in billions of national currency
Data since year 1992

Australia Historical GDP Growth

Historical GDP of Australia in billions of national currency. The GDP in local current prices has grown at the annual rate of 2.82% over the past 8 years. Please note this growth rate includes the effect of price inflation and it is NOT the real GDP growth rate. Current Annual GDP: $1,409 billion US dollars or 1,939 in billions of national currency.

Historical Stock Market Cap

Historical total market of Australia in billions of national currency. This value is normalized using the data published by WorldBank. S&P/ASX 200 is used for the normalization. The S&P/ASX 200 index is a market-capitalization weighted and float-adjusted stock market index of stocks listed on the Australian Securities Exchange.

Historical Total Assets of Central Bank

Historical Total Assets of Central Bank of Australia in billions of national currency, which is obtained from each country’s central bank balance sheet. Please be aware that if the total assets is displayed as zero or - , it suggests that there's no data available rather than the original data being zero. In this case, the modified version of both the ratio and projected annualized market return will be treated the same as the original version.

Original and Modified Historical Ratio of Total Market Cap over GDP (%)

The current ratio of total market cap over GDP for Australia is 123.4%. The recent 20 year high was 154.19%; the recent 20 low was 74.72%. If we assume that the ratio will reverse to the recent 20 years mean of 105.02% over the next 8 years, the contribution to expected annual return is -2%.

Based on the modified version, the current TMC / (GDP + Total Assets of Central Bank) Ratio for Australia is 94.71%. The recent 20 year high was 141.38%; the recent 20 low was 68.12%. If we assume that the ratio will reverse to the recent 20 years mean of 95.89% over the next 8 years, the contribution to expected annual return is 0.16%.

This is the detailed historical chart of the original TMC / GDP ratio and modified TMC / (GDP + Total Assets of Central Bank) ratio.

Based on these historical valuations, we have divided market valuation into five zones:

Ratio = Total Market Cap / GDP	Valuation
Ratio ≤ 74%	Significantly Undervalued
74% < Ratio ≤ 95%	Modestly Undervalued
95% < Ratio ≤ 116%	Fair Valued
116% < Ratio ≤ 137%	Modestly Overvalued
Ratio > 137%	Significantly Overvalued
Where are we today (2021-09-18)?	Ratio = 123.4%, Modestly Overvalued

Based on these modified historical valuations, we have divided market valuation into five zones:

Ratio = Total Market Cap / (GDP + Total Assets of Central Bank)	Valuation
Ratio ≤ 67%	Significantly Undervalued
67% < Ratio ≤ 86%	Modestly Undervalued
86% < Ratio ≤ 105%	Fair Valued
105% < Ratio ≤ 125%	Modestly Overvalued
Ratio > 125%	Significantly Overvalued
Where are we today (2021-09-18)?	Ratio = 94.71%, Fair valued

Predicted and Actual Returns

From the equation presented on the U.S. market valuation page,

Investment Return (%) = Dividend Yield (%) + Business Growth (%) + (Re/Rb)(1/T)-1

We can compute the predicted and actual returns of the Australia stock market over a given time period, T. In the calculation, we set T to equal eight years, the approximate length of a full economic cycle. The calculated results are presented in the chart below.

The Predicted Return line indicates the expected, or predicted annualized return for the next eight years if the current TMC / GDP ratio reverts to its recent 20 years mean of 105.02%.

The Modified Predicted Return line indicates the expected, or predicted annualized return for the next eight years if the current TMC / (GDP + Total Assets of Central Bank) ratio reverts to its recent 20 years mean of 95.89%.

The Actual Return line indicates the actual, annualized return of the Australia stock market over eight years. We use “S&P/ASX 200” to do the actual return calculation. We can see the calculations largely predicted the trend in the stock market as the actual return line is closely parallel to the two predicted return lines.

Conclusion

Under the original buffett indicator, the stock market of Australia is expected to return 3.5% a year for the coming years. This is from the contribution of economic growth in local current prices: 2.82%, Dividend Yield: 2.71% and valuation reverse to the mean -2%.

Under the modified model, the contribution of economic growth and dividend yield stays the same while the valuation reverse to mean changes to 0.16%. Consequently, the stock market of Australia is expected to return 5.7% a year.

This is the projected return and the modified projected return of the stock market in Australia relative to other countries. Click on the country on the left sidebar to check out the details for each country.





You can go here to see what international stocks Gurus are buying.