Where On Earth Are The Values?September 5, 2012 @ 8:24 AM EST
Well here we are, waiting and watching. Waiting on the ECB meeting (Thursday, September 6). Waiting on the Nonfarm Payrolls report (Friday, Sept. 7). Waiting on the European Commission to deliver their proposal on the new banking union (Sept. 11). Waiting on the German constitutional court to provide their ruling on the fate of the free world (aka the EU bailout fund and the Fiscal Compact on Sept 12). Waiting on yet another Fed meeting (Sept. 12-13). And waiting on the latest EU finance ministers meeting, which is currently set for Sept. 14-15.
While we're waiting (and watching the HFT algo's do what they do, oftentimes without so much as a rhyme or reason) we thought it might be a good idea to take a look at something fundamental in nature. I know, I know, I'm not known for my deep thinking analysis of all things macro. No, I prefer to let my market models and systems guide me in my attempt to keep the accounts I've been entrusted with on the right side of the major trends. However, from time to time, I like to check in on such things as market valuations, the economy, and earnings.
On that note, I've recently come across an analysis of market valuations that I thought was exceptionally interesting and I wanted to share. However, before I begin I should warn you that this is big-picture stuff and will be next-to worthless in terms of trying to identify where the market is going in the next day or two. But with that said, it is worth noting that the vast majority of the world's equity markets are currently undervalued relative to their long-term P/E ratios.
The fine folks at Ned Davis Research recently developed a new way to look at longer-term valuations. They took the price of a country's stock market in local currency terms and divided it by the 10-year average of the country's earnings per share. The concept is to smooth out the shorter-term fluctuations in earnings in order to provide a clear view of the big-picture valuations.
We then took each country's long-term, smoothed P/E ratio and compared it to the historical median. What we found was that there were just two countries at the present time that are overvalued relative to their historical medians (Mexico and Philippines) while forty-two countries are currently undervalued - some by quite a large degree.
Before we get to the rest of the world, let me start by saying that the U.S. market appears to be very close to fair value using this approach as the current P/E is 97% of the historical median. And while this indicates that there is some room for the bulls to run on the upside, it is hard to argue that stocks are historically cheap in the U.S.
Below is a list of the countries with the cheapest PE ratios relative to their historical mean.
As % of
Obviously some of the countries listed above are "cheap" on a long-term basis for good reason. At the top of this list are Greece, Spain, and Portugal. However, countries such as Austria, Finland, Singapore, Israel, and Brazil are not on the front lines of the current EU sovereign debt crisis and as such, may indeed represent undervalued situations.
So, while global investing has definitely taken a hit over the past few years and the U.S. has been a top performer, it is important to recognize that historically, this situation has been rare. If you look over the list of top performing countries on an annual basis, the U.S. doesn't even make it into the top three very often. Thus, it makes sense to us to recognize that investors may have to look beyond the shores of the U.S. for the next big opportunities. Yes, it may be awhile before these opportunities materialize. But, we are confident that the current U.S.-led market won't continue indefinitely.
Publishing Note: I won't bore you with my travel schedule, but it will suffice to say that my morning reports will continue to be sporadic into next week.
Turning to this morning... All eyes remain fixed on Europe in general and ECB President Draghi in particular. Currently there are a couple of reports indicating that the ECB's plans have been leaked. The futures are moving quickly and currently point to a flat-to-slightly-lower open in the U.S.
On the Economic front... We will get U.S. Productivity and Unit Labor Costs
Thought for the day... Be as you wish to seem. -Socrates
For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)
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Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Strategist
Positions in stocks mentioned: none
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The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice.