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
| Company Name | Market Weight | 10-yr avg P/E (NTM) | Current P/E (NTM) |
|---|---|---|---|
| Commonwealth Bank of Australia | 11% | 17 | 28 |
| Wesfarmers | 4% | 22 | 33 |
| Macquarie Group | 3% | 16 | 19 |
| Goodman Group | 3% | 22 | 25 |
| Woolworths Group | 2% | 23 | 24 |
| Aristocrat Leisure | 2% | 21 | 23 |
| Xero | 1% | 428 | 81 |
| Computershare | 1% | 17 | 19 |
| WiseTech | 1% | 75 | 78 |
| Cochlear | 1% | 42 | 38 |
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.
Disclaimer: This information was prepared and issued by Maple-Brown Abbott Ltd ABN 73 001 208 564, AFSL No. 237296 (“MBA”). This information is general information only and it does not have regard to any person’s investment objectives, financial situation or needs. Before making any investment decision, you should seek independent investment, legal, tax, accounting or other professional advice as appropriate, and obtain the relevant Product Disclosure Statement and Target Market Determination for any financial product you are considering. This information does not constitute an offer or solicitation by anyone in any jurisdiction. Past performance is not a reliable indicator of future performance. Any views expressed on individual stocks or other investments, or any forecasts or estimates, are point in time views and may be based on certain assumptions and qualifications not set out in part or in full in this information. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other MBA communications, strategies or funds. Any companies, securities and or/case studies referenced or discussed are used only for illustrative purposes. The information provided is not a recommendation for any particular security or strategy, and is not an indication of the trading intent of MBA. Information derived from sources is believed to be accurate, however such information has not been independently verified and may be subject to assumptions and qualifications compiled by the relevant source and this information does not purport to provide a complete description of all or any such assumptions and qualifications. To the extent permitted by law, neither MBA, nor any of its related parties, directors or employees, make any representation or warranty as to the accuracy, completeness, reasonableness or reliability of the information contained herein, or accept liability or responsibility for any losses, whether direct, indirect or consequential, relating to, or arising from, the use or reliance on any part of this information. This information is current at 23 May 2025 and is subject to change at any time without notice. © 2025 Maple-Brown Abbott Limited.
Dougal joined Maple-Brown Abbott in 2001 as an equity analyst. He is currently a portfolio manager and equities analyst. Dougal was an Executive Director from July 2009 to October 2018. Dougal’s responsibilities include equity analysis and portfolio management, including managing a large number of institutional and retail accounts. He attended the Advanced Management Program at Harvard Business School in 2014. Prior to joining Maple-Brown Abbott Dougal worked in a national law firm and at an international investment bank.
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