As I discussed in the Q1 investing climate, US stocks are at or near their most expensive valuation levels in history. Fortunately, there are more appealing opportunities available to the investor willing to go beyond our borders.
The chart below compares the cyclically adjusted P/E (CAPE) ratio of the US market to the rest of the world. This gives us an idea of just how expensive the market is at a given point in time.
The blue line above shows that the US market is nearing its most expensive level since the 1999 tech bubble. Meanwhile, the red line above shows that the rest of the world is fairly inexpensive relative to the past 40 years and vastly cheaper than the US market.
When you break down valuations by country you see huge discrepancies in valuations. The following table comes from Star Capital (https://www.starcapital.de/) and ranks various global markets by a variety of valuation factors.
| Country | Weight | CAPE | PE | PC | PB | PS | DY | RS 26W | RS 52W | Score |
| Korea (South) | 1.70% | 13.3 | 24.5 | 6.6 | 1 | 0.8 | 1.90% | 1.06 | 1.08 | 1 |
| China | 3.90% | 18.4 | 13 | 6.9 | 1.3 | 1.2 | 2.50% | 1.11 | 1.15 | 2 |
| Czech | 0.00% | 7.7 | 11.1 | 5.5 | 1.1 | 1.3 | 6.30% | 0.96 | 0.9 | 3 |
| Russia | 0.70% | 5.9 | 11.2 | 4.2 | 0.8 | 0.7 | 7.70% | 0.86 | 0.79 | 4 |
| Singapore | 0.60% | 10.7 | 19.4 | 6.5 | 0.8 | 0.8 | 4.30% | 0.96 | 0.87 | 5 |
| Austria | 0.10% | 10.4 | 15.8 | 4.5 | 0.8 | 0.5 | 3.20% | 0.91 | 0.83 | 6 |
| Spain | 0.80% | 10.5 | 24 | 6 | 1.1 | 1 | 4.20% | 0.94 | 0.88 | 7 |
| Turkey | 0.20% | 7 | 13 | 5.9 | 1.4 | 0.8 | 1.10% | 0.92 | 0.89 | 8 |
| Philippines | 0.30% | 14.3 | 21.1 | 8.8 | 1.6 | 1.2 | 1.90% | 1.06 | 0.98 | 9 |
| Poland | 0.10% | 7.4 | 14.8 | 5 | 0.8 | 0.5 | 1.10% | 0.82 | 0.77 | 10 |
| Portugal | 0.10% | 14.9 | 25 | 4.9 | 1.3 | 0.6 | 4.50% | 0.91 | 0.88 | 11 |
| Mexico | 0.40% | 14.9 | 21.6 | 8.7 | 1.6 | 1.1 | 2.80% | 1.03 | 0.93 | 12 |
| Japan | 8.40% | 18.8 | 25.3 | 9.2 | 1.2 | 0.8 | 2.30% | 1.01 | 1.01 | 13 |
| Hungary | 0.00% | 11.1 | 14.4 | 6 | 0.9 | 0.5 | 0.80% | 0.89 | 0.8 | 14 |
| Taiwan | 1.50% | 22.4 | 19.5 | 11.2 | 2.2 | 1.3 | 3.30% | 1.06 | 1.1 | 15 |
| South Africa | 0.50% | 15 | 17.7 | 8.7 | 1.8 | 1.5 | 2.90% | 1.01 | 0.94 | 16 |
| United Kingdom | 3.40% | 11.8 | 38.9 | 8.5 | 1.4 | 0.9 | 3.60% | 0.95 | 0.88 | 17 |
| Italy | 0.80% | 15.8 | 25.8 | 7 | 1 | 0.5 | 2.70% | 0.93 | 0.89 | 18 |
| Hong Kong | 4.50% | 13.2 | 21.8 | 13.7 | 1.7 | 2.1 | 2.20% | 1.04 | 1.05 | 19 |
| Germany | 2.90% | 15.5 | 29.7 | 7.8 | 1.5 | 0.8 | 2.60% | 0.94 | 0.96 | 20 |
| Malaysia | 0.40% | 14.3 | 24 | 10.5 | 1.5 | 1.9 | 2.90% | 0.98 | 0.97 | 21 |
| Thailand | 0.40% | 12.1 | 19.3 | 8.4 | 1.5 | 1.1 | 3.20% | 0.89 | 0.82 | 22 |
| Greece | 0.10% | -1.6 | 5.1 | 0.6 | 0.6 | 4.60% | 0.91 | 0.83 | 23 | |
| Finland | 0.40% | 22.8 | 18.5 | 12.5 | 1.8 | 1.4 | 3.00% | 1.01 | 1.04 | 24 |
| Israel | 0.20% | 15.5 | 22.1 | 12.9 | 1.3 | 1.1 | 1.70% | 0.98 | 0.9 | 25 |
| Canada | 2.60% | 19.5 | 27.4 | 8.6 | 1.7 | 1.4 | 3.20% | 0.99 | 0.97 | 26 |
| Indonesia | 0.40% | 13.3 | 19.6 | 12.8 | 2.5 | 1.9 | 2.80% | 1.01 | 0.93 | 27 |
| Norway | 0.30% | 13.5 | 35.9 | 8.8 | 1.7 | 1.2 | 3.50% | 0.94 | 0.91 | 28 |
| Australia | 1.80% | 16.9 | 29.2 | 11.5 | 2 | 2 | 3.60% | 1 | 0.99 | 29 |
| Belgium | 0.40% | 17.1 | 26 | 11.8 | 1.3 | 1.4 | 2.70% | 0.95 | 0.89 | 30 |
| Sweden | 1.00% | 20.7 | 17.1 | 14.8 | 2.3 | 2 | 1.40% | 1.01 | 1.06 | 31 |
| France | 3.40% | 17.1 | 43.7 | 9.1 | 1.6 | 1 | 1.90% | 0.96 | 0.93 | 32 |
| Ireland | 0.20% | 38.1 | 219.4 | 13.5 | 1.5 | 1.8 | 0.70% | 1.06 | 1.03 | 33 |
| New Zealand | 0.20% | 29.8 | 32.8 | 16.7 | 2.3 | 2.4 | 2.20% | 1.06 | 1.08 | 34 |
| India | 2.70% | 21.3 | 35.6 | 17.2 | 2.8 | 1.8 | 1.30% | 1.07 | 1.03 | 35 |
| Brazil | 0.80% | 15.5 | 32.3 | 8.1 | 2.1 | 1.5 | 3.20% | 0.92 | 0.79 | 36 |
| Switzerland | 2.50% | 23.7 | 23.7 | 13.6 | 2.6 | 2 | 3.00% | 0.97 | 0.97 | 37 |
| Netherlands | 1.40% | 23.7 | 46.1 | 13.7 | 2.1 | 1.7 | 1.50% | 1 | 1.02 | 38 |
| Denmark | 0.70% | 36.2 | 31.6 | 17.3 | 3.7 | 3.1 | 1.30% | 1.04 | 1.11 | 39 |
| United States | 47.60% | 29.8 | 29.1 | 16.1 | 3.8 | 2.4 | 1.60% | 1.01 | 1.03 | 40 |
As you can see, the US ranks at the bottom of the table indicating it is the most expensive market in the world. Countries like South Korea, China, the Czech Republic, and Russia come in as some of the cheapest. The US makes up somewhere around 24% of global GDP yet its market accounts for well over 50% of global stock market value.
A certain discount for markets like China and Russia is justified given questionable governance and other issues shareholders face in those countries. The industries that make up the bulk of many international markets are less attractive than the US index, which receives better profit margins from companies like Google and Microsoft. Some of the cheaper international markets are dominated by Energy, Financials, and Metals and Miners which all generally trade at lower valuation multiples over time. However I believe that gap is overdone and the enterprising investor can find opportunities abroad. The Russian and Czech market trade at dividend yields of 7.7% and 6.3% respectively. South Korea’s market trades at 1 times book value while Singapore’s market trades at 80% of book market. Meanwhile the US market pays a dividend yield of only 1.6% and trades at nearly 4X book value.
Even without more attractive valuations, most US investors would probably benefit from decreasing their allocations to US equities as most are massively overweight in their home country. The debt, demographics, and growth profile of much of the emerging world is far more attractive than the US. I think the best risk/reward opportunities can be found in individual international companies as opposed to entire countries or funds. Given the dearth of opportunities in the expensive US market, it seems the international market is the place to search for new investments.
Scott Caufield, CFA, CPA