The outperformance of value stocks in the Australian market has faded in the last few months after five successive months of relative gains compared to growth, from October last year through to the end of February. Value and cyclicals have received a boost from two key developments recently; initially the vaccine news in November 2020 and then a sharp rise in bond yields through February. The latter driver has been less evident in the following months, with bond yields stabilising in this time.
Chart 5: MSCI Australia: Value – Growth (Monthly)
Higher bond yields are typically associated with a lower PE ratio of the equity market, as illustrated by the chart which plots monthly data over the last decade. A key risk for equity valuations this year is yields rising from the lows of the COVID crisis, hence ongoing earnings upgrades remain important in maintaining the market’s momentum. Based on the bond yield/PE ratio relationship over time, the market currently looks to be slightly expensive.
Chart 6: ASX 200 slightly expensive relative to 10 year yield
The Australian equity market has had a strong first half of 2021, generating double digit returns approaching 30 June. Sectors that are more cyclical in nature continue to lead the way, including financials, materials and consumer discretionary. Only two sectors have declined year to date, being the interest rate sensitive IT and utilities sectors, though the former has rebounded significantly over the last several weeks.
Chart 7: ASX 200: Sector performance