If it has felt like global equities have done well this year that’s probably because they have. The MSCI All Countries World Index is up 15.7% in local currency terms YTD (18.4% in USD terms) and is now up about 40% off the February 2016 bottom. With rising prices comes rising valuations, but there are some subtleties to the valuation picture across the world for global equities.
Looking at the PE10 ratio (price divided by the rolling average 10-year of trailing earnings) across the major regions it’s clearly USA first, with the American stock market reclaiming the valuation heights of the 2007 top and the early stages of the dot-com boom. Elsewhere Developed Markets ex-USA are lagging behind, and Emerging Markets are at the bottom rung. This is a key reason why our view is favor global equities ex-US on a relative value basis (Japan, Europe, and Emerging Markets).
Another key metric we track is the breadth of valuations across countries for global equities, at this point, there are more countries showing up as “expensive” under the simplistic definition of having a forward PE ratio of at least 1 standard deviation higher than the long-term average. The chart shows this indicator climbing to levels where previous tops set in for global equities, yet still below the levels seen in the 90’s.
For more on our approach to analyzing global equities, see “Global Equity Breadth Beyond Price”
Global Equity Valuations: the PE10 valuation picture across the major regions/markets.
Global equity valuation breadth shows a rising proportion of countries showing up as expensive relative to history – notably around levels seen at the 2007 major market top and the 2015 top.
