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It's Starting to Get Pricey In Australia's Stock Market

Jackie Edwards

(Bloomberg) -- A strong rally to start 2019 has Australia’s stocks looking expensive, and that could be a bad sign for future gains.

The nation’s benchmark S&P/ASX 200 Index has advanced 16% this year, causing valuations to swell. The gauge trades at an estimated price-earnings ratio of 17.1, a level it hasn’t hit since September 2016, data compiled by Bloomberg show.

“We just don’t think that the current levels are sustainable at all,” said Karl Goody, a private wealth adviser at Shaw and Partners Ltd. in Sydney. Goody said he doesn’t see much upside to the “inflated” prices given the high valuations, the absence of analyst upgrades and a lagging economy.

The equity surge Down Under has overtaken New Zealand’s rally as the second-best performance among major stock markets in Asia Pacific year-to-date, after China’s. The benchmark gauge has eluded the uncertainty surrounding the federal election, an inquiry into financial-industry misconduct and a worst-in-a-generation housing slump. Its key stock gauge eked out a small gain Thursday, rising 0.1% as of 10:34 a.m. in Sydney.

Not everyone thinks Australian stocks are poised to decline. An interest-rate reduction from Australia’s central bank, improved sentiment about the housing market and the anticipation of tax cuts could support an upswing in the second half of the year, Citigroup Inc. analysts led by Tony Brennan said in a note last week.

And while the S&P/ASX 200 Index has kept hitting fresh highs this year, it’s still more than 4% away from reaching a record set almost 12 years ago.

Goody also cautions that lower interest rates aren’t always a positive for equity markets, which need long-term, sustainable growth to thrive.

“We shouldn’t be running as if we’re in a full-blown bull market because we’re cutting rates,” he said. “It’s a sugar hit, but that’s really all it is.”

(Updates with benchmark’s performance on Thursday in fourth paragraph.)

To contact the reporter on this story: Jackie Edwards in Sydney at jedwards160@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Joanna Ossinger

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