Investors round the world have sought returns in equity markets as central banks around the world have been propping up economic growth with extensive quantitative easing programs, causing a flood of liquidity, and low interest rates. The recent record-breaking rally in equities has also been accompanied by a surge in government bonds as investors have also sought a safe-haven for their money amid an uncertain global economic, financial and political outlook.
This piling into equities and bonds has prompted some market analysts to fear that equity markets have therefore become over-valued. So where should investors look to for quality, cheap stocks?
As we can see from the image above – globally there are not many indexes whose P/E ratio is below the 20 mark. The majority of those highlighted in blue (i.e. “cheap”) are not accessible to the average investor – such as Russia and China.
Europe is a mixed bag – with the UK leading the pack with an average P/E ratio of 39.5. Understandable considering the 8% rally of the FTSE post Brexit referendum – it is difficult to predict what will happen to the UK after they do leave the EU as there are no models to go on, but we believe that UK businesses will find it harder to be competitive with their European neighbors, despite the favorable exchange rate.
The US and Canada are similarly expensive, with a P/E ratio of 20.4 and 21.7 respectively.
With this in mind, where should investors look to? Although mainland China is not accessible to the average retail investor, the majority large cap Chinese companies also list on the Hang Seng. One benefit of Hong Kong listed companies is that there are no dividend withholding taxes at source.
Other interesting areas are Finland (try UPM Kymmene or Kone), along with Spain. Spain has the added benefit of being able to take dividends as stock in most cases – a helpful tax saving scheme by the Spanish government. We like the look of Grifols, for example.
Average index P/E ratios are not definitive proof of over valued stock markets – and those who buy individual stocks can still find a lot of bargain out there – we have 1,600+ stocks in our terminal alone who are trading below their NAVPS price. But for those who own ETFs it may be time to consider your positions.