The Search for Undervalued Global Markets

third-wave-finance-2-18-2017

After addressing the severity of the U.S. stock market bubble — see Stock Market Bubble Valuations — one may be interested in finding undervalued global markets; a good starting point would be the StarCapital valuation tool (also referenced in the Third Wave Finance Websites section — under the Resources tab).

Although the valuations are slightly delayed on the website (data from 12/30/2016), this resource provides a useful quick-view gauge of current global markets — a starting point for further research.  Notice that when sorted by CAPE ratio (a valuation metric discussed in Stock Market Bubble Valuations), the U.S. has the third most overvalued stock market in the world*.

Do note that global markets outside of the U.S. may be more volatile in the near-term (7-,5-, 3-years, or less); but historically over a longer timeframe (10 years for CAPE valuation) stock indexes with a lower CAPE ratio have generally outperformed those with a higher CAPE ratio.


A brief comment on short-term volatility and the interconnectedness of global markets is also worthwhile.  It’s important to note that:

  1.  Financial crises often bounce back and forth between domestic and foreign economies affecting multiple global economies…

    “For the most part however financial crises ricochet from one country to another. Juglar, Mitchell, and Morgenstern noted that financial crises tend to be international, and either affect a number of countries at the same time or alternatively spread from the centers where they originate to other countries.”       – Charles Kindleberger, Manias, Panics, and Crashes

  2.  There have been periods where (to the surprise of investors and investment professionals alike) the correlation between global markets becomes extremely high and strategies that diversify among global markets break down (mostly occurs during severe market moves).
  3.  As transportation costs and trade barriers (tariffs, etc.) fall, countries are more interconnected and are more easily affected by foreign crises…

    “. . .arbitrage connects national markets; the implication of the law of one price is that the difference in the prices of identical or similar goods in various countries cannot exceed the costs of transport and trade barriers.” – Charles Kindleberger, Manias, Panics, and Crashes

  4.  A high correlation in global markets is not merely a product of our “modern” world; the interconnectedness of markets and economies has existed for a very long time…

    “In 1929 all stock markets crashed simultaneously and again in October 1987 virtually all of the stock markets declined at the same time (ironically the one exception was the Tokyo market which then seemed the most overvalued). Even though national financial markets generally were believed to be more fully integrated in the 1980s and the 1990s than in earlier periods, share prices in the 1920s were as strongly correlated as in later decades. Because of the strong correlation of the stock price movements in different countries, many of the investors who sought to reduce risk by diversification through ownership of stocks in different national markets obtained smaller reductions in risk than they had anticipated.

    When changes in stock prices are small, the correlations between the stock price movements in different national markets are low. As the scope of the changes in stock prices increases, the correlations become larger.

    The pattern in the correlation between changes in stock prices in different countries is somewhat asymmetric in that changes in U.S. stock prices have a much more powerful impact on stock prices in various foreign countries than changes in stock prices elsewhere have on the U.S.”

    – Charles Kindleberger, Manias, Panics, and Crashes


As of 12/30/2016, country stock indexes ranked by CAPE ratio (from StarCapital):

Country CAPE Ratio
Russia 5.9
Czech 8.9
Turkey 9.4
Brazil 9.8
Poland 10.1
Portugal 11.3
Singapore 11.4
Spain 11.7
Hungary 12.5
Italy 12.7
China 12.8
Norway 12.8
South Korea 13.0
Israel 13.7
Austria 14.3
Hong Kong 14.3
United Kingdom 14.8
Malaysia 15.5
Australia 16.8
South Africa 17.6
India 17.6
Finland 18.1
France 18.3
Indonesia 18.5
Germany 18.6
Thailand 18.6
Taiwan 18.7
Netherlands 19.8
Philippines 19.9
New Zealand 20.3
Canada 20.5
Sweden 20.6
Belgium 21.3
Switzerland 21.5
Mexico 21.5
Japan 24.9
United States 26.4
Ireland 31.2
Denmark 33.3

As of 12/30/2016, regional stock indexes ranked by CAPE ratio (from StarCapital):

Region CAPE Ratio
Emerging Europe 8.6
BRIC (Brazil, Russia, India, China) 11.8
Emerging Markets 14.0
Emerging Asia-Pacific 14.9
Emerging America 15.2
Developed Europe 16.6
Developed Markets 21.9

As of 12/30/2016, the CAPE ratio of the entire world* stock index (from StarCapital):

World (All Capitalization) 20.8

*Do NOTE that the most significant and liquid countries were included in StarCapital’s list, but some small & illiquid markets were not included.

 

 

 




 

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