Navigating Overvalued Australian Equities: A Strategic Shift to Undervalued Global Markets

The Australian stock market, as of July 28, 2025, trades at a Price-to-Earnings (P/E) ratio of 19.38—a stark departure from its 5-year average of 16.96 and 20-year average of 14.66. This 3.31σ deviation above the long-term mean signals not just overvaluation but outright expensiveness. While the market has rebounded 8.9% in the June quarter of 2025 amid easing U.S.-China trade tensions and the RBA's easing cycle, the underlying fundamentals tell a different story. With corporate earnings growth constrained by inflationary pressures and a fragile private sector, the current premium pricing appears disconnected from near-term reality.

For investors, this divergence raises a critical question: Should portfolios remain anchored to a domestically driven market with stretched valuations, or pivot to global opportunities where undervaluation offers a margin of safety? The answer lies in rebalancing toward markets where fundamentals and valuations align more cohesively.

The Case for Asia and Europe: Undervaluation with Growth Potential

While Australia's P/E of 19.38 is overvalued compared to the MSCI EAFE's 17.06, it's only “fairly valued” relative to the broader All World index (P/E 21.09). Yet the global landscape reveals far more compelling opportunities. Consider Indonesia and the Philippines in Asia, and Denmark in Europe—markets where valuations are not just cheap but structurally attractive.

Indonesia (P/E 11.01): Despite a 4.87% GDP growth rate in Q1 2025—the weakest in three years—Indonesia's market trades at a 30% discount to its 5-year average. The economy's resilience in domestic consumption and a 25-basis-point rate cut by the central bank in May 2025 suggest a path to recovery. For investors, this represents a rare combination of undervaluation and macroeconomic support.

Philippines (P/E 9.33): The Philippines' market is “cheap” relative to its 5-year average of 13.77. With 5.4% GDP growth in Q1 2025 and inflation at a near-decade low of 1.4%, the country's low labor costs and English-speaking workforce position it as a manufacturing hub in the U.S.-China trade reset.

Denmark (P/E 13.98): Europe's standout undervaluation story, Denmark's P/E is 18% below its 5-year average. A stable services sector and a 200-day moving average trend +5.2% above its 2023 low make it a compelling case for defensive growth.

Rebalancing: A Strategic Imperative

The overvaluation of Australian equities isn't just a statistical anomaly—it's a risk multiplier. The S&P/ASX 200's 8.9% June quarter gain masks a 14% total return for the 2024/25 fiscal year, driven largely by a single stock: Commonwealth Bank of Australia (CBA). CBA alone accounted for one-third of the index's return, creating a concentration risk that rebalancing can mitigate.

A disciplined rebalancing strategy would shift allocations from overvalued domestic equities to undervalued global markets. For example:
- From Australia (P/E 19.38) to Indonesia (P/E 11.01): A 40% reduction in valuation risk.
- From Australia to Denmark: A 29% discount to historical averages.

Such a move not only diversifies risk but taps into growth narratives in emerging markets and stable economies. The Philippines' consumer-driven economy and Denmark's innovation in green energy are just two examples of sectors where undervaluation could translate to outperformance.

The Risks of Inaction

The RBA's easing cycle and the RBA cash rate projected to hit 3% by year-end may provide temporary relief for Australian equities. However, global trade tensions—particularly U.S. tariff policies under President Trump—remain a wildcard. A 2025 trade war scenario could trigger a market correction, compounding the risks of holding overvalued assets.

In contrast, undervalued markets offer a buffer. Indonesia's 12.7% FDI inflow in Q1 2025 and Denmark's 13.98 P/E ratio suggest that even in a downturn, these markets have room to absorb shocks.

Conclusion: A Call for Global Diversification

The Australian stock market's expensiveness is not a temporary blip but a structural overvaluation. For investors seeking to enhance risk-adjusted returns and mitigate domestic trade risks, the path forward is clear: rebalance toward undervalued global markets. Indonesia, the Philippines, and Denmark offer compelling entry points where valuations, economic fundamentals, and growth potential converge.

In a world of unpredictable trade policies and stretched valuations, diversification isn't just prudent—it's essential. The time to act is now, before the next global shock amplifies the costs of inaction.