Emerging Market Stocks are Overvalued

by: J.D. Steinhilber

The following tables analyze the valuations of U.S., International, and Emerging Markets stocks. For each asset class, we compare the most recent month-end valuation statistic to all valuation statistics for that asset class since 1/1/94.

To identify potentially overvalued or undervalued asset classes, we highlight current readings that fall into the highest or lowest quartiles of readings since 1/94. Current statistics that fall into the highest valued quartile are highlighted in red while readings in the lowest valued quartile are highlighted in green. For dividend yield, a higher percentile ranking indicates a lower valuation.

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Valuations for U.S. and International stocks appear inexpensive on a price-to-earnings basis, relative to other measures of valuation, because profit margins are currently at historic highs. Investors should be cautious in extrapolating current profit levels, because margins have historically been a reliably mean-reverting series. After generating 46% annualized returns over the past three years, emerging markets stocks are now in the 98th percentile of valuations, on a price-to-book value basis, since 1/94.

The second table examines relative valuations by analyzing the spread, or difference, in the valuation statistics of one asset class versus another:

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Emerging markets now appear somewhat overvalued compared with both U.S. and foreign developed markets, although emerging markets’ superior economic growth rates and their unprecedented fiscal health suggest that their valuations should be closer to those of developed markets than historically has been the case.