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Global Equity Valuations: Big changes, but some things stay the same

The global equity market correction has driven a reset in a number of market metrics such as sentiment (both economic sentiment and investor sentiment), fund flows, positioning, volatility, and of particular interest - valuations. Yet as much as there has been a minor adjustment in valuations, a couple of things stay the same...

Today's chart comes from my latest Monthly Chartbook, which presents a compilation of what I think are the key charts to be watching and a summary of views across asset classes.

The chart shows PE10 valuations for the USA, Developed Markets ex-USA, and Emerging Markets.

The PE10 valuation metric uses price vs 10-year average earnings (the intention is to smooth out the gyrations seen in trailing 12-month earnings due to recessions and other distortions). The PE10 valuation is in contrast to the two other main types of PE ratio: the trailing 12-month PE (price vs last 12 months earnings) and the forward PE (price vs consensus next 12 months earnings).

As I mentioned, there has been a minor reset in valuations across the 3 markets shown in the chart. The US PE10 fell the most from the high to the latest reading: -2.3pts to 30.1x, then Emerging Markets -1.5pts to 14.9, and Developed Markets excluding-USA fell -1.1pts to 19.1x.

Hidden in those numbers was a clue as to what *hasn't* changed through the correction. And that is that the US remains the most expensive market, and compelling relative value can be found offshore. Also worth noting is the circa-20% discount that EM is trading at vs DM ex-US.

So while valuations overall are slightly cheaper (or perhaps "less expensive") after the correction, US valuations remain toward the expensive end in absolute terms, and particularly so in relative terms.

This article originally appeared as a submission at See It Market


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