I have seen quite a few recent threads in this forum which discuss the fact that U.S. stocks are either fully valued or perhaps overvalued based on ten year cyclically adjusted PE ratios (PE10). There has been little or no discussion of the related issue about what PE10 says about the attractiveness of foreign stocks. The following article is, unfortunately, 1.5 years old, but it contains a wealth of information about PE10 in various countries around the world. The author's conclusion is that stocks in practically every other country are cheaper than U.S. stocks. Considering that PE10 for the U.S. market has gotten even higher since this article was written, I would suspect that the same conclusion holds true today. So foreign stocks may be worth consideration for investors who are concerned about high valuations in the U.S. but are reluctant to lower their overall stock allocations in view of the unattractiveness of the alternatives.
Shiller PE10 | Greenbackd
• For all developed equity markets the expected real return in local currencies is positive and the probability of negative real returns after ten years is generally low.
• The market with the lowest expected future return is the United States which together with Canada and Denmark promises real returns that are quite a bit lower than developed markets overall.
• Because of the low expected returns for US stock markets, an equal weighted portfolio of developed market equities is expected to perform significantly better than a typical value weighted portfolio. The current debate about optimal sector and country weights in a stock market index is still ongoing and there are many different rivaling approaches like equal weighting, fundamental weighting, GDP-weighting or equal risk contribution or minimum variance. The jury is still out which one of these approaches is the best for long-term investors, but our calculations indicate that an equal weighted portfolio should outperform a value weighted one.
• Looking at individual markets again, we see that the most attractive markets are generally the crisis-ridden European equity markets and in particular Greece which currently has such low valuations that real returns over the next five years could come close to 100%. But more stable markets like Finland, France or Germany also offer attractive long-term return possibilities.