Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 552

Finding single-digit PE stocks in an overvalued market

The most interesting high-level observation on markets at the moment is the fact that they are selling at an all-time high despite the elevation of geopolitical tension, complete confusion on the forward path of the economy, and the increasing technical skew in market indices that is no doubt a function of the never-ending march of passive investing.

Geopolitically, we have the real threat of war in Taiwan, the ongoing war in the Middle East, and the tragic war in the Ukraine.

On the economy, PM Capital’s view has not changed. We always thought that the economy would sustain itself through 2024 and that there was now a higher floor in inflation, meaning that although rates have gone up enough to dampen an already slowing economy, with higher embedded inflation and an economy that was in reasonable shape, it was unlikely that rates would need to fall too much or too soon. Central bankers could afford to be patient and historically, 4% interest rates are not that high especially given higher embedded inflation.

I would also reiterate the danger of making decisions based on macro-economic forecasts. In the last 12 months, market sentiment was convinced of the imminent recession, then became convinced of a soft landing, then started talking about no landing and now economic indicators are suggesting an upturn. Who knows?

The other feature of today’s markets is the unhealthy concentration of daily trading and the impact on market performance of what was the top ten stocks in the United States, then becoming the Magnificent Seven and the way it is going, likely to end up in the one and only – Nvidia.

It is interesting to note how the industry is always rabbiting on about concentration of risk yet here we are today with the greatest concentration of risk in the fewest stocks that we have ever seen. That creates the perfect opportunity for investors to diversify from that risk and take advantage of where the valuation opportunities are.

1 CBA = 3 of Europe’s top banks

That brings me to my favourite topic – Valuation.

Back in October we highlighted that “when I look at our portfolio, valuations still appear to be in our favour. …the overall Price-Earnings ratio of the portfolio is in absolute terms, probably as low a number as I can recall”. So, the uplift in the market from the September lows has not really surprised me.

What does surprise me is that valuations in some of our investment themes are more like what you see at the bottom of a market, not the top. Single digit PE ratios and double-digit dividend yields.

The most extreme example is our European Banks, selling on a 6x PE and a 10% dividend yield*. Here is an interesting anecdote.

CBA, the largest bank in Australia, has a market value of circa $200 billion and receives $1 of every $10 that flows into the Australian Stock Exchange from passive funds^. For $200 billion, you can buy some of the largest retail banks in Europe, like Lloyds in the UK, Caixia Bank in Spain, plus Intesa in Italy. The population of Australia is nearly 26 million. The combined population of the UK, Spain, and Italy is over 170 million. We are short CBA and long Lloyds, Caxia and Intesa.


Source: Morningstar

The point is that there are extreme valuation differentials in markets today and being passive (through index investing) is not the way to take advantage of them.

A further valuation anomaly

Another valuation extreme is the US dollar.

Having visited the United States twice in the last three months, it was quite stark how significantly prices have increased post-Covid and, in Australian-dollar terms, made you feel like a pauper.

Nominal prices are pretty much the same as Australia but after adding the 10% state tax, the 4% charge they now automatically put on your bill for the kitchen staff, then the 25% tip the waiter is expecting and converting into Australian dollars, the price is twice what you pay in Australia. So, an average pizza and beer at an average sports bar, is approximately A$80.


Source: Trading Economics

In another anecdote on the impact of Covid and why inflation is embedded in the system, I walked into a convenience store to get a bottle of water. I went to the counter to tap with my card and, before I tapped for the final amount, the machine asked if I would like to tip 20, 25 or 30%. No thanks…

 

Paul Moore is the founder and Chief Investment Officer of PM Capital. The information herein may change without notice, does not constitute advice or a recommendation, and does not take into account the objectives, financial situation or needs of any investor which should be considered before investing. Consider the PDS and Target Market Determination available at www.pmcapital.com.au and seek financial advice prior to making an investment decision. Past performance is not a reliable guide to future performance. The return of capital, or rate of return, is not guaranteed.

 

*As at 29 February 2024.
^Market capitalisation of ASX:CBA as at 19 March 2024 is $195 billion, source: ASX

 

  •   20 March 2024
  • 3
  •      
  •   

RELATED ARTICLES

Australia lags global dividend bonanza

Why the ASX 200 has gone nowhere in 16 years

LICs vs ETFs – which perform best?

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Latest Updates

Planning

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Superannuation

There's a reason why your super is locked up until your 60s

For decades, it seemed settled. Then one controversial idea reignited a debate that could reshape the financial future of millions. The real question isn’t who’s right or wrong, but whether a long-held assumption deserves another look.

Property

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Retirement

Under-retiring: The greatest retirement risk in a generation

Two retirees. Similar savings. Completely different lives. New research from Challenger reveals why some Australians confidently spend in retirement while others hold back and the overlooked factor shaping retirement decisions.

Five risks to watch in markets

Things you may often hear are: a recession is around the corner, markets are overpriced, the AI sector is about to flop at any moment. It’s like the never-ending laundry pile that sits in my house, it never really disappears.

Investment strategies

Do you qualify as ‘rich’?

What does it mean to be 'rich'? For something so universally desired, it is surprisingly difficult to define. That ambiguity creates a challenge for investors and raises a bigger question about what financial success really looks like.

Investment strategies

If you’re worried about your bond portfolio, you’re missing the point

Most investors think they know what bonds are for. But when markets turn volatile, a surprising misunderstanding can lead to costly decisions. Here’s the overlooked lesson that could change how you view your portfolio.

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.