Is the market overpriced? Episode II

Using Warren Buffett’s favorite broad market valuation metric of market capitalisation over GDP*, we can see valuations are on the high side, near to levels from early 2006, but nowhere near the alarming bubble of two years later. The Dotcom bubble (not shown) was even more severe.

NYSE Market Cap/Nominal GNP

*I have used GNP (or GNI as some call it) as this more accurately includes offshore income.

Australian investors will be relieved to find the ASX, at 100, reflects fair value. Even if we ignore the 2007 property/resources bubble.

ASX Market Cap/Nominal GNP

4 Replies to “Is the market overpriced? Episode II”

  1. Colin, I run this ASX-GNP chart with a similar result so I’m glad to find we agree on this one. Over longer periods the US example gives an average south of 100%, but the ASX still represents the better current value (by the way, my research gives the Aussie CAPE on 15 or 16, which seems to support middle of the road value).

  2. Hi Colin – A clever indicator that I haven’t seen charted before. Should we not include the cash held on the balance sheets though? Maybe an Enterprise Value to GNP ratio would be a more accurate equity valuation?

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