Long Term Valuation Update

It’s been a few months since we’ve provided a valuation update for various global indices.  In past updates, we’ve stuck exclusively to longer-term 10-year Shiller P/E levels.  In this update, we’ve added two other fundamental valuation metrics to provide some additional color: trailing EV/EBITDA and Price to Book.  Across the board, the numbers generally come to the same conclusion: US and Japanese markets in the developed world, and India in the emerging world, are currently trading rich to the broader EAFE and emerging market indices.  As we’ve warned in the past, keep in mind that longer-term valuation metrics such as these aren’t necessarily good short or intermediate term timing indicators, but have provided strong, statistically significant long-term returns predictions.  

Let’s start with Shiller CAPE P/Es using earnings and index data provided by Bloomberg:

Source: Bloomberg

Nearly all major European indices are currently trading below longer-term averages.  Of course, Europe has been stuck in recession for several quarters and has experienced several major market hiccups over the past three years, all factors serving to compress market multiples.  If Europe can continue to slowly rebuild market confidence and stabilize its broader economic situation, there is the opportunity for decent long-term outperformance in European markets relative to developed Asian or US markets, especially in the periphery countries (and France).  Speaking of developed Asia, Japan with its massive rally over the past six months has leaped to the top of this valuation table, as well as the other valuation tables we’ll present below.  Certainly, economic prospects and confidence have brightened in Japan in recent months as fiscal and monetary authorities have finally taken an aggressive and consistent approach to solving growth woes; however, markets seem to have gotten ahead of themselves.  This week’s volatility in Japanese markets may be an early sign that markets are due for some consolidation.  Finally, emerging markets are trading at a discount to the EAFE and US markets.  India, however, stands out as particularly overvalued relative to nearly all developed and emerging equity markets, despite the fact that India’s SENSEX index has traded in a range for the past five years.  Russia, on the other hand, remains among the “cheapest” of the emerging market indices, occupying a space near the battered European periphery economies.  Russia has resided in the cheap realm for several years.  Multiples remain compressed as investors believe the Russian government and Russian business entities remain hostile towards shareholder interests.  

On a Price to Book basis, the valuation situation described above remains roughly the same, though Europe has flipped positions with the All Country Asia index.  Still, we see the European periphery countries, plus Russia, occupying the low valuation spots (Greece, Russia, and Italy are trading below book value) while the US, Japan, and India occupy higher spots than the broader indices.  Australia creeps up the list here as well.    

Source: Bloomberg

On an Enterprise Value to EBITDA basis, we see a similar layout to the tables above, though the US comes out a little bit better than it does with the other metrics:

Source: Bloomberg

Considering there are some differences in position among the three metrics, we decided to average the rank for each country across P/E, P/B, and EV/EBITDA.  Simply, the lower average ranks represent higher relative valuation positions.  Here are the results:

Source: Bloomberg

Again, India, Japan, and the US occupy the most expensive spots when it comes to relative valuation.  When all is said and done, Australia also appears to trade at a decent premium to other markets.  Germany and the UK trade at a premium to their European cohorts.  Asia in general trades at a premium to broader European indices.  

All in all, we continue to believe that overseas developed and emerging markets will outperform US markets over the next decade, though in the emerging markets complex it might benefit investors to look at emerging markets outside of the BRIC countries, which (except for Russia) are trading at premiums to other indices.  India’s markets seem particularly vulnerable in coming years considering it comes out as the most expensive and the broader economy has shown a disconcerting inability to grow to potential in the face of a sclerotic political system, infrastructure issues, and other inefficiencies.