The purpose of this blog post is to take an objective and balanced account of what may well end up becoming a generational buying opportunity in global equities.
To do this I will lay out a set of useful charts and indicators; explain the conceptual framework and how they tie in with each other; and of course ultimately reach some initial conclusions and illuminate the risks and opportunities developing in the current environment.
First, I feel it necessary to acknowledge that this is a terrible situation that we all find ourselves in right now. Not only do we all find ourselves and our loved ones in actual danger, but the economic and market turmoil is also very unsettling. But as investors we are tasked with the responsibility to mentally set those things aside and do what must be done.
With that said, let's get on with the charts.
1. Market Breadth Meltdown
First chart will be a familiar one for regular readers: I talked about this one back in October last year as what looked like a new cyclical bull market was emerging ...of course that was before the global coronavirus pandemic hit! But anyway, first I will explain what it is, this chart shows the proportion of countries we track (70) whose main equity benchmark is positive on a year over year basis. Much like the traditional market breadth indicators that track individual stocks, this indicator helps identify emerging strength and weaknesses, divergences, and turning points for global equities by tracking countries. After turning up in 2019, the indicator crossed above the 60% mark (a useful point of delineation for minimizing false positives, albeit with the sacrifice of timeliness - you miss the first part of the rebound, but equally lower the odds of piling in on a bear market rally)... but subsequently collapsed; activating the first of 3 possible signals.
What to watch for: Aside from the 60% rule, buying opportunities can be found in two other situations: first and most risky is when breadth collapses to below 20%, second and less risky - but not without false positives: when market breadth collapses and then turns up (eyeballing the chart you can see several instances of this). So at this point we have the first one, but of course neither of the other two signals (yet).
2. Valuation Breadth: Most Countries are Cheap Now
Keeping with market breadth, this is another unusual/non-traditional indicator. This chart shows the proportion of countries we track (in this case a narrower universe of 47 countries - basically all the countries in the MSCI EM + DM indexes) whose PE10 (price vs 10 year average trailing earnings) is either below 15x (a best guess for what represents a "cheap" valuation) and 25x on the top side (a best guess for what represents an "expensive" valuation). As you can see, the proportion of countries trading on cheaper valuations moved from a low of 23% earlier this year, to now almost 70%. In other words, in the wake of the market crash, 2/3rds of the world now see their equity market trading on cheap valuations.
What to watch for: This is about as good as it gets, but of course it did go slightly higher at the deep dark depths of the financial crisis, so as always "cheap can get cheaper". The other thing to note is that there are still some markets which although cheaper now vs a couple of months ago, are still historically high, and that brings us into the next one...
3. PE10 Valuations: EM back to 2003 (!)
This is a remarkable chart for a few reasons. First and most notable is the Emerging Markets PE10 ratio dropping all the way back to 2003 levels; surpassing the lows of both 2015/16 and 2008/09. Not far behind is Developed Markets (excluding the USA), which are rapidly closing in on the 08/09 lows. And last but not least, is the USA, which although a lot cheaper (or should we say less expensive), it's not quite reverted back to the lows of 2015/16, and remains materially higher relative to the 2009 low. Of course we should note in passing that this is absolute valuations, and when you look at it on an ERP (equity risk premium) basis the valuation picture is a lot more compelling (both for US and global ex-US equities).