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By Seema Shah, Chief Global Strategist
Global equity valuations are stretched, characterized by the U.S., Europe and Japan all sitting at or near record highs. However, amidst the elevated valuations, pockets of opportunity are emerging – especially within U.S. small-caps, buoyed by favorable economic conditions, and in Latin America, where compelling valuations align with strong fundamentals.
Global equity returns and valuations
Last twelve months returns and % times cheaper, MSCI indices
Source: FactSet, Bloomberg, MSCI, Principal Asset Allocation. LTM (last twelve months) returns are total return and in USD terms. % Time Cheaper is relative to PAA Equity Composite Valuation history. PAA Equity Composite Valuation is a calculated measure, comprised of 60% price-to-earnings, 20% price-to-book and 20% to dividend yield. Composite started in 2003. EAFE is Europe, Australasia, Far East. See disclosures for index descriptions. Data as of March 31, 2024.
Global equity markets are painting a nuanced picture heading into the second quarter. While the U.S. market’s ascent to record highs has been led by the Magnificent 7, pushing large-cap valuations to their limits, Europe and Japan have also etched new benchmarks.
In the U.S., the contrast between the stretched valuations of large-caps and the (slightly) more attractive figures for small- and mid-caps suggests a potential pivot point for investors.
In particular, small-cap’s appeal is likely to be bolstered by the goldilocks combination of a soft landing and imminent rate cuts. Europe, on the other hand, offers a more subdued outlook despite being meaningfully less stretched than the U.S. – reflective of the region’s economic stagnation.
Conversely, in Japan, the return of inflation, positive interest rates, and corporate governance reforms present opportunities for unlocking value despite its elevated valuations.
Emerging markets present a mixed bag. India remains on the pricier end, and China’s market is likely to continue struggling unless policymakers introduce new and impactful stimulus measures.
However, investors should keep their eye on Latin America, which currently benefits from some of the most attractive valuations globally. When combined with its positive fundamentals, a strong investment case for the region is beginning to emerge.
Global valuations undoubtedly are stretched, but a closer look reveals pockets of potential opportunity that can benefit from the constructive macro backdrop.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
