- Given high U.S. valuations, investors should look to other markets for relative value.
- European and Japanese economies are finally growing, despite a recent slowdown.
- Political turmoil is muddying the waters, once again.
It’s tough to ignore one simple fact: U.S. stocks have outpaced other developed market equities over the past 102 months by a wide margin, on a rolling three-year basis. This period of relative underperformance offers value-oriented investors a place to bargain-hunt at a time when U.S. equities and many other asset classes are expensive by nearly all measures.
Global equities (ex-U.S.) remain attractive due to several factors, including the so-called “valuation gap” between U.S. companies and their counterparts in Europe and Japan. On average, the price-to-earnings ratio of developed-market, non-U.S. stocks is 14.3, compared to 16.6 for U.S. stocks, as of May 31, 2018. That’s a big difference and it could mean that these markets have more room to run while U.S. stocks may struggle in the face of such lofty valuations.
“The key question is, can global equities do well without the U.S. leading the way?” asks Lisa Thompson, a Capital Group portfolio manager. “I believe they can, on a relative basis, given the more attractive valuations we are seeing in many non-U.S. markets.”