Even with the sell-off in US equity markets in 2022, the market remains highly valued at 19.2 times 2022 expected earnings. And higher valuations in US equities tend to make global equities look expensive given the high weighting of US equities in the world index (circa 60%). The MSCI All Country World Index, for example, trades at 15 times earnings. When you look outside of the US, however, valuations look much more attractive.
The chart on the right shows the price-to-earnings ratio for the MSCI All-Country World Index ex-USA. This index is composed of all stock markets in the world – developed and emerging – except the United States.
As the chart shows, global equities outside of the US are trading at 11.9 times earnings – having come down from an undemanding 14.8 times at the start of this year.
By comparison, back in the late 1990s, most of the world’s equity markets were trading at significantly elevated valuations relative to history. As the chart highlights, the World ex-US equity markets were trading at near 35 times trailing earnings back then (see the green circle on the left in the chart). That’s an earnings yield of just 2.7%.
Readers should not be confused by the subsequent occasions when the price-to-earnings ratio in the chart also spiked to over 30 (see the red circles in the chart). These represented periods of depressed earnings during recessions (2002, 2008, 2012, and 2020) and did not signal high valuations.
News flow is full of doom and gloom at present, but not all markets are equal, in our view. Going into a likely recession, the World ex-US equity markets are trading at a valuation that is two-thirds less than what pertained back in the late 1990s ahead of the 2000-03 recession in the developed world. In addition, interest rates are far lower today, so that the alternative risk-free asset still offers little competition for investors’ dollars.
We must distinguish between deteriorating news flow and what’s already priced into equity markets. In our view, a lot of bad news is already priced in. This is not to say that these markets can’t go lower in the short-term. However, it does increase the odds of satisfactory returns from these markets on a 5-year view.
For investors looking for access to these more attractively valued markets, we cover a number of funds in the members’ area of the website and in our newsletter that are dedicated to or have a significant weighting in equities outside of the US. As a subscriber to our website, you would get access to in-depth research on such funds. If interested, you can click on the link above for more information, or email info@gillenmarkets.com to arrange a free trial.
