US Stock Valuations Are High Compared To Global Stocks

US stocks have had a multi-year bull market until recently. Even after the recent shakeup stocks have recovered and are again rising strongly. However in terms of valuations, American equities are expensive relative to their foreign peers. While US stocks have always enjoyed a premium over other developed markets, in terms of performance US stocks and global stocks take turns every few years. Or to put it another way, in some years US outperforms other developed markets while in other periods, other markets beat the US market.

Global stock are attractive relative to their US peers from a valuation perspective. From a recent article at Hartford Funds:

An Open Call

Movie producers aim to discover and groom a young actor or actress before he or she becomes a big star. The same goes for investors looking to buy equities. (FIGURE 4).
After taking their valuations into consideration, EM and developed markets (DM) appear to be inexpensive when compared with their US equivalents. Add in their dividend growth and dividend yield, and it may potentially be worth taking another look at these regions.

FIGURE 4

Global Equities Characteristics(12/31/2017)

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Based on the percent of total holdings of the MSCI ACWI Index. Data Source: FactSet, 1/18. Estimates are subject to change.

 Tomorrow’s Marquee Names?

Paying too much to hire a big name star, who ultimately fails to put people in seats, is a regular occurrence in Hollywood. Sometimes the less-hyped talent end up surprising everyone. Likewise, the developed markets with higher country returns may not be what many would expect (FIGURE 5).

While returns have generally been strong across the board, many other countries fared as well or better than the US. Surprisingly, other countries typically associated with being some of the world’s economic generators also returned less. They had forward Price/Earnings (PE) ratios9 higher than less expensive countries that provided better returns over the past year. That means those big name markets are predicted to cost investors more, but may offer less in returns.

FIGURE 5

International Markets Have Offered Attractive Valuations

1-Year Performance and Forward P/E Ratios

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Data Source: FactSet, 1/18. As of 12/31/17. Performance data quoted represents past performance and does not guarantee future results. Returns and P/E based on the individual region/country returns of the MSCI ACWI Index. Countries listed by market-cap size. A simple average was used to calculate the return and P/E for countries in the “Other” category. Country portfolios are capitalization-weighted with free-float market cap. The portfolios are theoretical and assume no fees, trading costs, or any short selling restrictions. Actual results may differ significantly. Performance is based on annual “total returns,” which includes reinvested dividends but not interest, capital gains, taxes, or transaction costs. MSCI performance is shown net of dividend withholding tax. Index is unmanaged and not available for direct investment. Please see the back page for representative index definitions.

Source: A Reboot for International Equities, Hartford Funds, Jan 2018

The complete article linked above is worth a read.

The Dividend Yields of Developed Markets

The dividend yield of the US equity market as referenced by the S&P 500 has hovered around the 2% mark for many years now. This is one of the low yields among the major developed markets.

At 4.18% for the S&P/ASX 200 Index, Australia has the highest dividend yield of all developed markets. Norway has thesecond highest at 4.08% followed by the UK at 4.02%. The linked Bloomberg article notes that Australia has consistently yielded over 4% or more in dividend yields this decade.

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Source: Singapore Loves Dividends, Australia Most Generous, Bloomberg

The key takeaway for American income investors is that they need to cast a wide to gain higher yields. One way to do this is to diversify across many developed markets especially high-yielding ones like Australia and Norway.

The World’s Top 10 Dividend Payers in 2017

Dividend payout reached another record in 2017 according to a study by Janus Henderson. The trend is likely to continue and they predict dividend payouts to increase by 8% this year.

The following firms were the top 10 dividend payers in 2017:

Rank Company
1 Royal Dutch Shell
2 China Mobile
3 Exxon Mobil
4 Apple
5 Microsoft
6 AT&T
7 HSBC
8 China Construction Bank
9 Verizon Communications
10 Johnson & Johnson
Total $120.5bn
% of total 9.60%

Two of the top dividend payers in the world are from China. The rest of them are from either the US or developed Europe. After years of struggling oil majors are starting to generate decent profits and are slowly rewarding their shareholder with higher payouts. From an article at U.S. Funds:

Big oil is generating as much profit at 60 dollar oil as it was at 100 dollars

Major Oil Producers Are Rewarding Investors and Have Been Growing Dividends
  • As the above chart demonstrates, oil companies are leaning up. In the final quarter of 2017, profits were back to 2014 levels due to CEOs focusing on squeezing more out of each dollar through slowing projects, renegotiating contracts and shrinking the workforce.
  • Although oil production has been flat for the past few years between the five supermajors, companies are focusing on earning more per barrel rather than boosting production volume.
  • Companies have also been rewarding shareholders by using cash to increase dividends. Major producers Exxon, Shell and Chevron have been boosting their dividends and have 5-year dividend growth of 7 percent, 4.3 percent and 4.2 percent, respectively, as of 12/31/2017.

Among the tech giants, Apple(AAPL) and Microsoft(MSFT) are now sought after for their dividend income by investors. This is a huge shift from the dot com days when most tech firms paid no dividends and were mainly considered for their growth prospects.

Disclosure: No Positions

A Comparison of Sector Allocations of Major Market Indices: Chart

Among the major MSCI market indices, allocations to various sectors differ widely. For example, Financials account for nearly a quarter of the emerging markets index while they constitute only about 15% in the S&P 500. In Canada, financials have a higher allocation at about 34%.

The tech sector’s allocation in the EAFE and Canada’s benchmark index are very low relative to their allocation in the US and emerging market indices.

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Source: CC&L Financial Group

In The Long Run The Black Monday Was A Blip

On Monday, October 19, 1987 the Dow Jones Industrial Average fell an astonishing 22.61%. This was one of the largest declines in the US markets. Though “Black Monday” was scary it was a great time to buy stocks. In fact, in the long run the declines of that Monday turned into just a blip according to an article at Schroders.

MSCI USA: 1970-2017 and the blip that was Black Monday

MSCI performance between 1970 and 2017

 

 

From the article:

The market blip that was Black Monday
The chart below reflects the fluctuations in the US stockmarket since 1970. It illustrates how Black Monday registered as barely a blip in the long term and how resilient stocks have been over the last 47 years.

Those who invested after Black Monday would have seen $100 turned into $1,135 without considering the dividend income paid out. That high return was achieved despite remaining invested through the dotcom crash of 2000-03 and the global financial crisis of 2007-09.

Source: Black Monday 30 years on: how it happened and what we can learn, Schroders

The key takeaway is that dramatic declines on a single day may become insignificant when looked at a long-term perspective of many years.