Global equity valuations have recently peaked to reach earlier highs and stocks are now more dependent on earnings to move higher, according to an article by Jeffrey Kleintop of Charles Schwab. From the article:
Earnings are the most important driver of the stock market over the long term. The global stock market, as tracked by the MSCI All Country World Index, has stalled since earnings peaked in mid-2014. Moreover, the index is within a few percentage points of its level back in 2008, at the previous earnings peak.
It’s not just earnings that have rebounded to previous peaks. Global stock market valuation, measured by the price-to-earnings ratio, is back at the level of 15 seen at the two prior earnings peaks. A price-to-earnings ratio divides a company’s share price by its per-share earnings to show how many multiples of earnings an investor must pay to acquire a share of stock.
With valuations having recovered, the global stock market is now more dependent on earnings growth to push stocks higher. Without the return of earnings growth, global stock markets may continue to stall, as they have over the past six months, even as they’re dealing with heightened volatility.
Click to enlarge
Data Source: Factset as of 2/10/15
Source: Global Earnings Per Share Could Rebound Soon, Feb 18, 2015, Charles Schwab
The year-to-date returns of some major developed markets indices in price terms are shown below:
S&P 500 Index: 2.5%
UK’s FTSE 100: 5.3%
France’s CAC 40: 13.1%
Germany’s DAX Index:12.7%
Spain’s IBEX35 Index: 5.8%
The year-to-date returns of some emerging markets indices in price terms are shown below:
China’s Shanghai Composite: 0.4%
India’s Bombay Sensex: 6.3%
Brzail’s Sao Paulo Bovespa: 2.5%
Chile’s Santiago IPSA: 3.5%
Mexico’s IPC All-Share: 0.9%
For US stocks, the P/E ratio looks a bit extended at 17.55 for the S&P 500 compared to a year ago.
Given the high valuations of global stocks, are there any stocks that investors can consider adding now?
Of course. There are plenty of stocks that long-term investors can consider at current levels. This is because these stocks have recently declined due to overblown worries, stocks have higher growth potential, etc.
Among the developed markets, stock prices of Canadian bank are attractive since they have fallen recently/ For example, Royal Bank of Canada(RY) is trading at just over $60 a share now as markets punished the bank for the planned acquisition of City National Corporation of Hollywood, California in addition to overall re-evaluation of Canadian banks in the past few months due to their exposure to the oil industry. However Royal Bank is the most profitable bank in Canada and is well managed than others. Recently the bank completely exited the Latin American market due to issues related to money-laundering concerns by regulators. With a current dividend yield of 4.0%, the bank is a great buy.
Investors can also consider Auotliv(ALV) or Magna(MGA) in the auto parts sector, railroad stocks such as Union Pacific(UNP), stocks in the chemical sector such as BASF (BASFY), high quality stocks in the oil and gas industry, etc.
Disclosure: Long RY