Markets around the world continue the 1st quarter churn after a superb 2013. Coming into today (Friday) many developed market indices remained stuck in a performance range within relatively close proximity to the zero line, though Japan is off to a very poor start after an extraordinary 2013 (Topix down nearly 11% YTD). Amazingly, emerging markets continue the free fall observed over the past year. The MSCI Emerging Market Index is down nearly 6% YTD coming into today vs. approximately -1% for the MSCI EAFE and flat for the US S&P 500.
Reviewing valuation around the world near the end of Q1, we continue to see a world where the US appears moderately overvalued using long-term valuation metrics, developed Europe hovers around median valuations, periphery Europe remains near the bottom of the valuation tables, Japan is over-extended, Asia ex-Japan is mixed, and emerging markets remain undervalued overall, though individual countries present a more mixed picture as well.
Against the valuation backdrop presented below, we remain more sanguine longer-term on ex-US equity markets and believe talk of a new long-term secular bull market in US markets is a bit premature at this stage.
Finally, a few notes: to calculate long-term P/Es, we use Bloomberg earnings data to calculate the trailing 10-year average earnings for each country’s primary index. P/E ratios are inflation adjusted using OECD inflation indices for each individual country.
As we always point out, long-term real P/E ratios aren’t suitable for making short-term timing decisions but demonstrate solid statistical significance in terms of predicting long-term returns, i.e. annualized returns over the subsequent 7 to 10 years.
|
|
10-Yr P/E Ratio
|
|
YTD Perf 2014
|
|
Japan
|
23.34
|
|
-10.53%
|
|
US
|
21.01
|
|
0.37%
|
|
South Africa
|
20.67
|
|
1.00%
|
|
Germany
|
20.00
|
|
-1.78%
|
|
Canada
|
19.22
|
|
5.16%
|
|
India**
|
18.31
|
|
3.02%
|
|
EAFE****
|
17.99
|
|
-2.75%
|
|
Taiwan
|
17.84
|
|
1.23%
|
|
Mexico
|
17.53
|
|
-11.29%
|
|
South Korea**
|
16.44
|
|
-4.54%
|
|
Australia
|
16.21
|
|
1.16%
|
|
Britain
|
16.04
|
|
-2.31%
|
|
China
|
13.79
|
|
-5.27%
|
|
EmMkt****
|
12.14
|
|
-7.93%
|
|
Hong Kong
|
12.09
|
|
-7.18%
|
|
France
|
12.02
|
|
-1.83%
|
|
Italy
|
11.82
|
|
7.49%
|
|
Greece
|
11.03
|
|
13.48%
|
|
Brazil**
|
11.01
|
|
-12.16%
|
|
Spain
|
10.75
|
|
-0.33%
|
|
Russia
|
5.57
|
|
-17.73%
|
Returns through mid-day 3/14/14
**Simple return calculations
****YTD Index ETF return through mid-day 3/14/14
