By John Abernethy, director, Clime Investment Management Ltd
Money Magazine, July edition
Are Australian shares attractive at current levels?
Share prices, as opposed to share values, are constantly adjusting based on fear and greed (speculative activity). More important is the observation that over the longer term the price of a company’s share (and the market) will move towards the intrinsic value of that company (and the market). Many shares make up the market, thus the market will move towards fair value over time based on exhibited earnings and the dividend returns to owners.
Therefore, deciding whether the market has fully adjusted to an event such as the breakdown of the euro zone is difficult to determine. But right now the market is pricing into Australian shares a lot of short-term bad news. This is observable in terms of the price discount to intrinsic value that shares are currently trading at. Investors are panicking and illogically “focusing on a return of their capital rather than a return on their capital”.
Clime regards a breakdown of the euro zone as a low possibility. We proffer the view that the emergence of sustainable growth in Asian, south African and South American countries is under-estimated. It will ensure world economic growth remains positive, as will the Australian economy, and thus many Australian shares are attractive at current levels.
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