Is the market cheap or expensive in September?
Undervalued stocks still outnumber pricey ones by a wide margin globally, but recent uncertainty has put a damper on the bargain bonanza. Australian equities are more expensive than their European and American peers.
August was a negative month for stocks, with the Morningstar Global Markets index 1.8% lower by month-end in AUD terms. Still, Morningstar analysts are touting fewer stocks as great-value buys than a month earlier.
Morningstar's star rating has a great advantage over traditional Price/Fair Value calculations in that it incorporates a level of uncertainty in its estimations. Two companies can have a very similar Price/Fair Value, but that does not necessarily translate into the same Morningstar rating.
Therefore, looking at the number of stocks getting four and five stars (stocks considered as a buy - in green in the chart below) and the number of stocks with one or two stars (considered as a sell - in red) offers a better clue as to whether the stock market is cheap or expensive.
In August, the percentage of stocks with four or five stars from our entire database (around 1,500 companies covered by our Equity analysts) decreased from 54% to 52% by the end of the month. That's down from a June high of 60%. Meanwhile the percentage of stocks with one or two stars stayed at 16%; their lowest level was also reached in June with 11%. Global markets, according to our analysts, are still relatively cheap.
Australia more expensive than USA and Europe
If we compare the breakdown of ratings between the United States, Europe and Australia, Australia stands out as the most expensive market. In Europe, the sum of one and two star stocks is 12%, compared to 18% for the United States and 23% for Australia.
Four and Five star stocks represent 60% of our European universe, compared to 47% in the United States and 60% in Australia.
As liquidity picks up in the months ahead, it pays to look abroad for Australian value investors.