With the global equity market correction spreading from Emerging Markets and Europe finally over to America too, it’s tempting to ask (given the move in valuations): are global equities cheap yet? …and which countries are the cheapest?
In this article we provide an update to the “top 10 PE10” series, providing an insight into global equity valuation trends and a snapshot of relative value across countries. In particular we focus on the PE10 valuation metric, which as I explain below is a great tool for assessing value.
From the original article – The Top 10 PE10 – why look at the PE10:
“The PE10 is a stock market valuation metric which compares the price to the average earnings of the past 10 years. The reason to look at average earnings is that it smooths out the peaks and troughs that result from business cycles. It’s also useful for analyzing countries that typically see greater volatility of earnings e.g. where the index is particularly concentrated. Overall the key point is that it gives a less noisy signal, and from an investing standpoint the biggest challenge is to make the distinction between signal and noise.”
Before we get into it I will note however that valuation is only one factor (in my process I like to look at valuation, economic/earnings cycle, monetary conditions, sentiment/positioning, and technicals). In assessing which markets and asset classes present the best balance of risk vs opportunity it’s important to keep the whole picture in mind like this, and it’s also worth noting that metrics like the PE10 provide the strongest signal over a medium-longer term basis.
- The Top and Bottom PE10: So here it is again, the top and bottom 10 PE10 valuations across countries (this is the top/bottom of the 47 countries we track – see further down for the full table). The most obvious standout is the USA, with America first in the valuation tables… which of course means it’s the most expensive market on a relative basis. At the other end of the spectrum are a couple of usual suspects, where the phrase “cheap for a reason” may come to mind. Interestingly there is a fairly balanced representation of DM vs EM across the two ends of the valuation spectrum, with the high end featuring some of the typically more expensive and ‘growthier’ emerging markets, and a couple of smaller developed markets.
- Cheap countries vs Expensive countries: Moving on, this chart provides an interesting lens on global equity valuations, combining a cross-sectional view with a time series view. Basically I’ve used “15 and below” as an arbitrary level for being “cheap”, and “25 and above” as being “expensive”. You can see that around the turn of the year there were a greater proportion of countries presenting as expensive, and a smaller and smaller cohort of cheap countries. One thing the global stock market correction has done is increase the proportion of countries trading on cheap valuations to about a third. Charts like this probably provide a good case for country selection in global equity strategy!
- PE10 Across the Major Blocks: Taking a look at the major regions or blocks of global equities, the relative value aspect is laid out ever more starkly. Even after the correction, US equities remain substantially more expensive vs developed markets ex-US and emerging markets. Looking at the historical comparison US valuations also look elevated vs history. As I noted before, the signal from valuation tends to bring with it greater confidence over the longer run, and this chart should provide some pretty strong clues as to my views on long term relative performance expectations!
- Full Ranking Across Countries: As promised, here’s the full table of PE10 rankings across the countries we monitor. Similar to the first table, there is a fairly even split of representation by emerging vs developed markets, and I think it will be fair to say that some people might be surprised at where certain countries/markets sit relative to their peers.
To sum up the key takeaways, there are some clear standouts on the rankings on both the expensive (e.g. the US) and cheap end of the spectrum. Importantly, the second chart showed us that there are currently more “cheap” countries following the correction. And finally, the third chart showed us the lay of the land across the major global equity blocks, where again the relative value case against America and for DM ex-US and emerging markets looks compelling, at least on a pure valuation case and within this particular valuation lens.
Stay tuned for future updates to this, what is now a running series of articles. I for one am looking forward to see how the valuation landscape shifts and evolves as we progress to the later stages of the global market cycle… and the risks and opportunities that this flags for active allocators.