Where is the value in Australian share markets?

Given the Australian equity market is now trading around all time highs, it isn’t surprising that many stocks look expensive. As the charts below illustrate, it is the Industrials that look particularly stretched.

Market PE looks very full – with industrials notably expensive

Source: Goldman Sachs Investment Research, FactSet, data to 23 May 2025.

The Industrial benchmark incorporates the expensive valuations of key benchmark stocks such as Commonwealth Bank (CBA, 28 PE¹), Goodman Group (25 PE), Macquarie Group (19 PE) and Wesfarmers (33 PE). These four stocks comprise > 20% of the benchmark. If we include National Australia Bank (15 PE) and Westpac (16 PE), this increases to ~30% of the benchmark (both these stocks are expensive relative to their history although less extreme). These premium valuations clarify why we have significant overweight positions in a number of the more attractively valued defensive stocks and the absence of most of the largest capitalization names in our portfolios.

Expensive Big Caps

Watch out when the tide goes out

Source: FactSet, data to May 2025.

CBA remains a global outlier in terms of large bank valuations with a valuation of ~$300bn and trading more than three times book value. There have been numerous contributing factors to the almost unprecedented revaluation of CBA over the last year or so, including international buying as investors deserted China in the second half of 2024 and diverted some of those funds to our larger liquid stocks. Domestically, super funds invested significant funds into the Australian market over recent years and this together with ongoing moves from active to passive management has seen the super fund holdings in the banks increase. Active managers have been sellers of banks and appear to have record underweights to the sector with their outperformance being a headwind to performance for most active managers. Renewed investor interest in China and US tech valuations coming under pressure is likely to see a broadening of investor appetite. We are of the view that the next 12 months will be far more challenging for the banks and given their extended valuations we are materially underweight the sector.

Super funds have been large buyers of banks

Active managers are significantly underweight the sector

Net purchases of banks sector (A$ bn; rolling annual)

Source: ABS, Morgan Stanley Research. Data to December 2024.

Where is the Value in Australian equities?

Given the market volatility, we believe a skilled active manager with insight into the sectors and stocks in the Australian market can add value to your client portfolios.

Financials (AKA the Banks)

Banks make up nearly a quarter of the Australian equity market, with CBA alone accounting for over 10%. Given their limited earnings growth and already high valuations, they are unlikely to drive market returns in 2025, and investors may only see returns from dividends. As a result, the portfolio is significantly underweight in banks.

In contrast, we believe the outlook for general insurers is more positive due to continued (though slowing) premium growth and sustained higher interest rates.

Resources

Resources (including Miners and Energy) also comprise around a quarter of the Australian equity market. Predicting short-term returns in this sector is especially difficult, largely due to uncertainty around China’s economy and potential U.S. policy shifts. That said, Energy remains attractively priced, and the portfolio is overweight in this area.

Industrials

Industrials, which make up the rest of the market, still appear expensive overall, though less so than during the pandemic. While some domestic cyclicals could benefit from future rate cuts, the timing remains uncertain. We are finding better value amongst the defensives and groups of companies where idiosyncratic challenges have negatively impacted valuations. If, as we expect, returns are low going forward these stocks should hold up relatively well.

1  All PE data is FactSet FY1 consensus as at May 2025.

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