We last looked at the long-term valuation picture back in May for various countries and indices around the world. Normally, we’d wait a few more months for an update. But, in light of the fact that various global markets have experienced some severe turbulence over the past few months, especially emerging markets, we thought it would be appropriate to check back in on various valuation metrics.
As with the last update, we’ll focus on three metrics, 10-year normalized P/E, price to book, and trailing 12-month index EV/EBITDA, across 17 individual developed and developing country indices and broader regional indices. To ascertain a rough overall valuation ranking, we’ll average the rankings across all three individual valuation metrics, then rank the 17 indices based upon the average value. We’ve derived all data for the calculations from Bloomberg’s index earnings data.
Let’s begin with long-term normalized P/E ratios, ranking the indices from most expensive to least expensive:
 |
| Source: IronHorse Capital |
Much like mid-May, Japan and India top other developed and developing countries when it comes to price relative to long-term average earnings. With the recent strong move in US markets, the US overtook Germany for the third spot. Greece, Russia, and Spain maintain the three lowest valuation positions, with Italy and France not too far behind. The Euro periphery, which France is increasingly becoming associated with, remains the cheapest corner of the global equities space on a long-term P/E basis. Overall, relative P/E rankings remained relatively static over the past few months. PE ratios in absolute terms shifted down, especially in emerging market economies which have been hit hard over the past few months. The MSCI Emerging Market Index ratio has fallen, for instance, over a point and a half. Regionally, ex-US, Asian countries display a P/E ratio approximately 25% higher than the ratio for European stocks and approximately 40% higher than the general emerging markets PE ratio. The S&P 500, however, remains more highly valued than the other regional/international indices.
 |
| Source: IronHorse Capital |
On a price-to-book basis, Euro periphery and emerging market indices still occupy many of the lower spots. There are a few notable differences, however. Japan looks much more attractive on a price-to-book basis than using normalized earnings, potentially due to the fact that using normalized P/E ratios in Japan could be problematic due to their long-standing deflationary conditions and stagnant economy. The US and India remain at the top of the valuation list. EAFE stocks hold a higher valuation than emerging stocks, just as above, but Asian stocks come in at lower valuation levels than European stocks flipping the situation in the P/E category. Japan probably helps pull the overall Asian index downward.
 |
| Source: IronHorse Capital |
On an EV/EBITDA basis, trailing 12-months, Japan finds its way back near the top of the table, with the US and India again occupying spots near the top. Brazil shoots to the top of the list, a sharp contrast to its lower relative valuation placements in the other tables. Again, Asian equities hold a higher valuation placement level than Europe, while developed market valuation again exceeds emerging market valuation. German equities look better by this metric. Still, the Euro periphery again occupies most of the final spots.
 |
| Source: IronHorse Capital |
Take all valuation metrics into account and there are a few relative valuation ranking changes from our last report in May. First, the fact that Japanese stocks cooled off a bit this summer pushed the relative ranking down two spots. Likewise, China’s equity market declines have pushed the Shanghai Composite’s relative ranking down four spots. As such, all the BRIC indices except for India reside in the mid to lower portions of the table.
The broader picture is reasonably consistent with the picture a few months ago. India and the US remain overvalued relative to peer countries, while the European periphery hangs near the bottom. Meanwhile, emerging market valuations keep creeping downward.
As we mention every time we look at longer-term valuation metrics, these numbers shouldn’t be used for short or intermediate term trading decisions. However, the longer term valuation metrics demonstrate decent statistical significance when it comes to forecasting long-term annualized returns (i.e. 8 to 12 years out). Based on the above valuation information, markets are obviously discounting or over-discounting the prospect for poor outcomes in the periphery European nations and emerging markets (ex-India), generally a precursor to decent/positive outcomes in the long-term. As such, we believe that long-term returns in these areas will outpace returns in areas such as the US, India, and Australia over the next decade on an annualized basis, though the volatile news flow emerging from these countries should continue to keep investors holding onto their seats in the near term.
