Is the bubble about to burst?
by Nafiz Hussein, 16/03/2006

A number of investor’s may be speculating that the Australian share market is a bubble soon to burst. This is partially due to the significant rise that our share market has experienced over the last few years. 

Three years ago the Australian share market was in the doldrums with investors fearing the effects of war in Iraq and the sluggish global economy. Fortunately the Australian share market started to grow and thus began its sensational bull run. Today we are celebrating the third anniversary of an outstanding bull market with the ASX 200 Accumulation index returning 106% over the past three years.

Dr Shane Oliver from AMP has recently indicated that despite the share market nearing the historic 5000 level Australian shares are not in a bubble and the market is not yet overvalued. In fact he believes that local shares are still cheap and sees more upside in the near future.  The main reasoning Dr Shane has put behind his verdict is that Australian company profits have also been rising over the past three years, and that they are increasing faster then the growth in Australian company values.  With this reasoning he believes that from a valuation perspective share prices are now surprisingly cheap.

Fundamentally share prices should be valued more then what they currently are, based on recent company earnings growth. This would suggest further upside potential.       

So there is no need to rush off selling your domestic shares just yet, but instead perhaps re-weight your portfolio. Try to include more of those stocks that have had a significant rise in profits but who have not yet had their share price catch up.

References: Investorweb, Olivers Insight. Financial Review