Buffett Indicator: Australia Stock Market Valuations and Expected Future Returns

Updated at Sun, 24 Jan 2021 20:30:05 -0600
Country: Australia (updated daily) check out Global Overview for detailed methodology.

The Stock Market is Modestly Undervalued.

Ratio of total market cap over GDP: Recent 20 Year Maximum - 220.28%; Recent 20 Year Minimum - 86.56%; current - 113.74%
Expected future annual return: 7.7%

ETF Used for dividend yield: EWA (Yield=2.52%)
Market Index used: S&P/ASX 200
Current Annual GDP: $1,570 billion US dollars or 2,029 in billions of national currency (GDP in Local Current Prices Annual Growth=3.35%)
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 3.35% 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: $1,570 billion US dollars or 2,029 in billions of national currency.

Australia GDP (Billion, 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.

Australia Total Market Cap (Billion, National Currency)

Historical Ratio of Total Market Cap over GDP (%)

The current ratio of total market cap over GDP for Australia is 113.74%. The recent 20 year high was 220.28%; the recent 20 low was 86.56%. If we assume that the ratio will reverse to the recent 20 years mean of 131.48% over the next 8 years, the contribution to expected annual return is 1.83%. This is the detailed historical chart of the ratio.

Australia Ratio of Total Market Cap over GDP (%)

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

Ratio = Total Market Cap / GDP Valuation
Ratio ≤ 92% Significantly Undervalued
92% < Ratio ≤ 118% Modestly Undervalued
118% < Ratio ≤ 145% Fair Valued
145% < Ratio ≤ 171% Modestly Overvalued
Ratio > 171% Significantly Overvalued
Where are we today (2021-01-25)? Ratio = 113.74%, Modestly Undervalued

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 green line indicates the expected, or predicted return if the market ratio trends near the recent 20 years average ratio of 131.48% over the next eight years.

The blue 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 blue line is closely parallel to the green line.

Predicted and Actual Returns of Australia


The stock market of Australia is expected to return 7.7% a year for the coming years. This is from the contribution of economic growth in local current prices: 3.35%, Dividend Yield: 2.52% and valuation reverse to the mean 1.83%.

This is the projected return of the stock market in Australia relative to other countries. Click on each bar in the chart to go to other countries:

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

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