Developed market ex-US equities may be cheap for a reason, and can get cheaper — TradingView News

DEVELOPED MARKET EX-US EQUITIES MAY BE CHEAP FOR A REASON, AND CAN GET CHEAPER

Some market players have been arguing that there is an opportunity in Developed Market Ex-US equities (DM) based on valuations.

Austin Pickle, investment strategy analyst at the Wells Fargo Investment Institute (WFII), admits that whether one looks at absolute or relative valuation metrics, that DM appears cheap, especially given it’s trading at less than 15x its consensus forward next 12-month earnings vs around a 21x multiple for the S&P 500 index SPX.

That said, Pickle sees two issues with relying solely on an investment thesis built around valuations.

First off, he says assets can be cheap for a reason. Pickle notes that when it comes to the main building block of equity returns, that earnings growth for the MSCI EAFE Index (.dMIEA00000PUS), WFII’s DM benchmark, has been unable to compare to that of the SPX.

“Since 2007, DM earnings growth has been nearly nonexistent while S&P 500 Index earnings have grown substantially. As a result, the S&P 500 Index has experienced impressive price gains while DM prices have languished for 17 years,” writes Pickle in a note.

Another issue Pickle highlights is that “cheap can always get cheaper.” He notes numerous instances over the past 17 years where seemingly rock-bottom DM valuations only led to greater underperformance through now leading him to conclude that “valuations have generally been terrible market timing tools.”

Pickle’s bottom line is that valuations are but one piece of the investment puzzle.

“A U.S. dollar bear market akin to the early 2000s or late 1980s, a substantial rebound in global growth and trade, a shift in sentiment, and an improved technical profile all could spark a DM run,” he writes.

Overall, WFII is neutral on DM. However, within the group, Pickle says they are neutral the Europe region and favorable the Pacific region relative to the broader DM benchmark.

Here is a long-term monthly chart of the S&P 500 index / MSCI EAFE Index ratio:

SPXMSCIRatio03192024
Thomson ReutersSPXMSCIRatio03192024

(Terence Gabriel)

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INVESTORS TO CEOs: WE WANT YOUR CASH! – CLICK HERE

BOJ: WHEN’S THE NEXT RATE HIKE? – CLICK HERE

AI, ‘GREEN SHOOTS’, M&A: KEY DRIVERS ON THE RISE – CLICK HERE

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