Is the S&P/ASX undervalued at 6700?

‘Don’t ask why, just buy’ might be the global mantra right now, but some analysis suggests the Australian sharemarket is undervalued.

The S & P/ASX200 has pushed through 6700. Picture: Gaye Gerard

“Don’t ask why, just buy” is the mantra governing global stockmarkets, helping to propel global indexes to new highs and getting Australian stocks into the black for the year.

This month the ASX200 index has increased a stunning 800 points, or 13 per cent, marking the best November in recent memory and following Wall Street’s best November for 33 years.

The S&P 500 index is up 12.5 per cent for the year and Australia is lagging because it doesn’t have the COVID stocks that are driving the US.

These include health care and drug makers, which are being buoyed by the hope of imminent vaccines, and big Tech, which is booming on the fast-forward to digitisation.

The strong message from the RBA is rates will be lower for longer with a pick-up in jobs now the key indicator for the central bank, not asset prices.

Liquidity is a key driver of the market’s moves, with money flooding into US stock funds.

The debt binge continued with the Victorian state budget this week.

MST strategist Hasan Tevfik maps the market value at a 10-year average earnings per share and on that basis it is trading at a price earnings multiple of 19.5 times against an average 21 times.

This suggests the market is cheap, and to get to the long term average should be trading above 7000 points, compared to the 6700 it hit on Wednesday.

The Australian market is dominated by the big banks, who in the wake of a better economy and reviewed APRA rules, could be trading at higher levels with better dividends than expected.

Meanwhile, some semblance of normality returning in US politics has boosted American stocks, along with news that Janet Yellen will be US Treasury Secretary.

She is highly regarded on both sides of the house and as a former US Fed boss well versed on both fiscal and monetary policy.