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Equity valuations: A case for global diversification

Quick takes on capital markets

January 27, 2023 | 2 min read
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After a tumultuous 2022 for global equity markets, many regions are now offering more attractive valuations. The U.S. and India, however, are the notable exceptions, highlighting the importance of global portfolio diversification during the year ahead.

Global equity returns and valuations
Last twelve months returns and % time cheaper, MSCI indices

Global equity map showing the last twelve months returns and % time cheaper. MSCI indices, as of Dec 31, 2022.

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. Data as of December 31, 2022.

At the start of 2022, global equity valuations were significantly stretched. Following an extremely challenging year which saw some indices drop by 20%, equity valuations have become more attractive, with some global markets even considered “cheap.”

Today, for example, Germany has only been cheaper 9% of the time, and the UK just 13% of the time. In emerging markets, China has been cheaper around 40% of the time, while Brazil has rarely been more attractive.

In the opposite direction, however, two major markets stand out. In India, its relatively small 8% decline last year didn’t pull down valuations as significantly as other global markets. In the U.S., despite a 20% and 32% decline in MSCI large-cap and growth indices respectively, markets have still been more attractive over 80% of the time.

While expensive valuations over the past decade did not present any obstacles on the way up, cheap valuations do not necessarily present any obstacles on the way down—particularly if equity fundamentals remain weak. Watch for region- specific growth outlooks to potentially improve, driven by China’s reopening or falling European gas prices, which, combined with the valuation picture, could prove instructive as to where the best opportunities may lie.

In the year ahead, the looming U.S. recession will weigh on the broad equity market outlook. For investors, however, the relatively attractive valuations outside the U.S. suggest opportunities exist.

Equities
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