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Is super the only thing keeping our market afloat?

Tom Hickey
Monday, February 05, 2018

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A common argument from equity naysayers is that our stock market is being artificially propped up by the constant stream of money pouring in via superannuation.

The logic goes that because there is so much money entering the stock market via super contributions (let’s call this the superflow), stock prices are kept high despite not much real growth in company profits.

But can this argument hold water?

The first thing to do to answer that question is to look at the superflow, and the first thing you notice here is: the superflow is bloody big.

Each month, Aussie workers put billions of dollars into super accounts. According to the Association of Superannuation Funds Australia (ASFA), superannuation assets grew by $25 billion over the last quarter of 2017. That’s growth of about $278 million dollars every single day.

There’s now over $2.5 trillion in aggregate super assets in Australia. $2.5 trillion. That’s $2,500,000,000,000. There are a lot of zeros in that number.

All of this money has to go somewhere, and it turns out that about half of it ends up in equities, with just under a quarter ending up in ASX listed companies.

Source: ASFA. Chart displays average asset allocation of APRA regulated funds.

So what are these huge inflows doing to company valuations? All else being equal, if there is more and more money investing in the same amount of stock, simple supply and demand logic would suggest that valuations should go up.

Has this happened?

According to the average PE ratio (what’s a PE ratio?) since 1980 is 15 times earnings. At the depth of the GFC, PE ratios were as low as 8.2 times, and they blew out in the dot com boom in the late 1990s to around 23 times earnings.

So where are we now? At October last year the average market-cap weighted PE ratio for companies on the ASX was 15.8 - only marginally higher than the 27-year average.

Over the past 12 months PEs have actually been coming back, as share prices track sideways despite modest growth in corporate earnings. So based on PEs alone, the superflow doesn’t seem to be having much of an impact.

Source: Chart shows Market-cap weighted PE Ratio for the Australian stock market.

But why not? Surely with all of this extra cash flooding the market, valuations should be pushed up?

While on first view the superflow appears huge, if you take a closer look it actually doesn't seem quite as significant. Of the $25 billion superflow last quarter (the number would actually be a bit smaller given this includes investment growth, not just inflows), around 23%, or $5.7 billion, will end up invested in ASX-listed companies.

In the grand scheme of things, this actually isn’t that much. In fact, it represents just over a quarter of 1% of the market cap of all ASX-listed securities. Not really enough to make a material impact on share prices.

So next time somebody suggest the Aussie market is being held afloat by our super system, you can explain to them why that isn’t the case.

Or another approach would be to play devil’s advocate. Say, for argument's sake, superflows are propping up our market. What’s the big deal? With super balances growing at the rate they are and compulsory super contributions set to increase to 12% over the next few years, it’s not going to change anytime soon. So you may as well go along for the ride.

Published: Monday, February 05, 2018

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