22nd Jul 2020 by Josh Matthews, HBA

Will inexpensive international equity valuations drive future stock market returns?

global valuations

Stock markets around the world have appreciated significantly from their late March lows but the rebound has not been even.

Since the lows, US equity markets have rebounded more than most developed market countries during Q2 2020, but continue to trade at much higher valuations than other markets.

Current Global Stock Market Valuations

  US Markets [1] Non-US Markets [2] Emerging Markets [3]
Price/Earnings 23.49 18.94 14.43
Price/Book 2.99 1.39 1.43
Price/Sales 2.17 1.07 1.15
Price/Cash Flow 11.76 6.23 5.14

Source: Morningstar

[1] SPDR S& P500 ETF Fund (SPY) as of July 10th, 2020
[2] iShares EAFA Index Fund (EFA) as of July 7th, 2020
[3] Vanguard FTSE Emerging Market ETF (VWO) as of June 30th, 2020

This is important because there is a strong long-term correlation between current equity valuations and future expected returns.

Correlation of CAPE Ratio with S&P 500 Index Real Return

Source: Research Affiliates, LLC, based on data from the Robert Shiller database. 1881 - October 2017

CAPE: Also known as the Shiller P/E, the Cyclically Adjusted Price to Earnings Ratio (CAPE) is a measure of price divided by an average of 10-year earnings, all adjusted for inflation. The objective of the CAPE is to provide a measure of price to earnings that is independent of short-term fluctuations in the business cycle.

During a recent interview with one of our Co-Founders and Managing Partners, Nobel Laureate Robert Shiller reiterated how non-US markets appear to be inexpensive with higher expected returns. Click here for the full interview.


On a relative basis, non-US markets are also trading at inexpensive valuations compared to their own historical valuations. Emerging Market equities are cheaper than 88% of history and non-US Developed Market equities are cheaper than 77% of history while the US is only cheaper than 5% of history.[4]  

Current and Historical Market Valuations.[5] 

Source: Research Affiliates, June 30th 2020

As you might recall from our recent article on valuations released in April, the long term valuation differences between regions has led to our relative overweight of Emerging Markets versus US stocks. This decision has started to pay off for investors and recently Emerging Market equities have outperformed US equities. In the past month, Emerging Market equities have outperformed the US and non-US Developed Market equities by circa 10% respectively.

Emerging Markets Outperformed US and Non-US Developed Markets in the Past Month [6] 

Source: Morningstar, June 8th to July 8th 2020 

To summarize, investors need to decide where to take risk in their pursuit of returns. In equities, we currently favour International and Emerging Markets over the US because of their inexpensive valuations in both absolute and relative terms and because there is a high correlation between current valuations and future expected returns.

[4] Based on CAPE valuation as of May 31st, 2020 source: Research Affiliates

[6] SPDR S&P 500 ETF Fund (SPY), iShares EAFA Index Fund (EFA) & Vanguard FTSE Emerging Market ETF (VWO) 


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