Australian Stocks Cheapest to World Since 2005: Chart of the Day

Australia’s stock market hasn’t been this cheap since 2005. UBS Group AG, which this year correctly foresaw gains, says a rally is coming.

The CHART OF THE DAY shows Australia’s S&P/ASX 200 Index traded at 14.6 times estimated earnings on Dec. 12, compared with 16.3 on the MSCI World Index of developed-market shares. The gap reached the widest in nine years on Dec. 1. The lower panel shows the Commonwealth Bank of Australia’s commodity price index, a gauge of raw materials weighted to the country’s trade, declined more this year than the London Metal Exchange’s benchmark measure of base-metal costs.

“Commodity prices have weighed on the market appreciably in recent months,” said David Cassidy, Sydney-based strategist at UBS. “The extent of pessimism appears overdone. Market valuations are undemanding.”

The S&P/ASX 200 Index will rally to 5,700 by the end of 2015, a 9.2 percent advance from the Dec. 12 close, Cassidy said. The stock gauge has fallen 7.8 percent from this year’s peak in September as the commodity-price drop spurred traders to increase bets that the nation’s central bank will cut interest rates from a record low.

Materials firms from BHP Billiton Ltd. to Fortescue Metals Group Ltd. comprise 15 percent of the Australian market index by weighting, three times more than the global equities benchmark. They are among companies contending with a glut in the supply of resources from iron ore to coal after a decade of price gains fueled by Chinese demand. China is on course for the weakest annual economic expansion since 1990.

Cassidy estimated last year that the S&P/ASX 200 would climb 4.7 percent to reach 5,400 by the end of June. The gauge closed at 5,395.75 on June 30.

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