14 NOVEMBER 2024
Most valuation metrics suggest US equities are overvalued, but that isn’t the case for most other regional stock markets.
Book value represents a company’s net asset value (its assets minus its liabilities) as reported on the balance sheet. For headline indices, the book value is an aggregate measure for all constituent listings.
The blue line in the chart below shows the S&P 500 trading above 5x on a price-to-book basis. This is high, even for a growth-oriented index, and shows investors are currently willing to pay an unusually high premium compared to the value of the underlying companies.
In turn, this suggests there is little margin for error if the fundamental outlook for US companies sours.
Conversely, valuations look far more supportive for emerging market (EM) stocks, which are currently trading on 2x price/book.
As the chart below shows, with the exception of the late 2000s it is perfectly normal for EM equities to trade at cheaper valuations compared to US stocks.
However, the gap between the two has widened significantly in recent years and this will likely correct at some stage. This all adds weight to the argument we could be on the verge of a spell of outperformance for EM stocks. This will likely be led by Chinese equities, given the PBOC’s recent stimulus U-turn.
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