Surge poses question of value

Over the past year local shares have pushed more than 20 per cent higher, leading to debate over whether the market has been overcooked.

The forward price-to-earnings ratio - which uses market value per share over earnings forecasts per share - for the benchmark S&P/ASX 200 over the past 12 months has run at levels not seen since the global financial crisis.

While down from this year's high, the market is trading on a forward PE ratio of 15.4, above the five-year average of 13.4.

Credit Suisse analyst Damien Boey said investors should be wary of a false bottoming out in the earnings cycle.

"If you extrapolate a little bit forward, a China slowdown would probably mean commodity prices fall a little bit and some sort of domestic slowdown, which may have an effect on the ability of our economy to generate credit and money supply growth," he said.

Mr Boey said he expected earnings to fall about 8 per cent.

Forward earnings per share for the ASX 200 have increased 15.6 per cent in the past three months, sitting at $341.66, while the market has jumped 13.2 per cent. "If you believe that market EPS could fall from here, then the market is very expensive," he said.

Macquarie Private Wealth division director Martin Lakos said while the market was expensive, he believed the outlook for Australian companies was more positive. Mr Lakos said earnings growth for the last financial year was near expectations, down 3.7 per cent. "The forecast for 2014 is a positive 16 per cent and 2015 11.5 per cent," he said.

"It's not stellar growth but it's reasonably good recovery."

Mr Lakos said much of this growth is predicted to come from the resources sector.

Mining stocks have had a rough year, falling 26.2 per cent from their 2013 high before bottoming out in June. They have since recovered 18.4 per cent but are still down 12.7 per cent from this year's peak. The forward PE ratio for the resources sector is at 13.4, near its five-year average of 13.2. Mr Lakos said the resources sector, which spent billions of dollars putting infrastructure in place, could now produce larger volumes, albeit at lower commodity prices, which would result in high profitability.

"These companies, BHP and Rio in particular, have got a higher focus on total shareholder return," he said. "From the strong cash flows that come out of this, we're expecting higher dividends from the resources sector."

The US Federal Reserve's decision last week to keep its $US85 billion-a-month bond-buying program in full will also have implications for the Australian sharemarket. Mr Boey said the decision to put tapering on hold was effectively a de-rating of the US economy.

"There is a re-rating of emerging markets relative to developed markets and Australia, coincidently, is caught right in between all that tension," he said.

On the Australian sharemarket, Mr Boey said he expected emerging market-driven exposures and bond proxies to hold up but said everything related to developed markets may underperform.