Developed Markets Are a Little Bit More Expensive
Global Equity FVMR Snapshot
Global overview: Market is up by about 12%
The first thing that we can see is that the global markets have an ROE of about 13%; about a 40% or so dividend payout ratio; about a 15x to 16x PE; and about 2x price-to-book. The EPS growth expectations for 2017 and 2018 are, let’s say, about 12%.
Recently, the market has been hit slightly but over the last one year, the global market is up by about 12%.
Gearing is, let’s say, a little bit over 50% though, over the past 12 months, we can see that it has come down. This was 2015 when we had full data for at all companies.
Finally, the volatility on a short-term basis was about 5.6% standard deviation versus 9.4% on a yearly basis.
Once we understand what’s happening in the world, let’s look at emerging versus developed markets.
Fundamentals: Developed markets have a bit better ROE
The first thing that we can see is that emerging markets have an ROE of about 12% and 13% for developed markets, so there’s a little bit more ROE in developed markets.
Valuation: Emerging markets are relatively cheap on a PE basis
Now, if we look at the main developed market─the biggest one─the US is about 15x to 16x PE so we can see that Japan is very cheap at about 8x PE.
If we then go and understand what’s happening with PE, what we can see is that though the global PE is about, let’s say, 16x in 2017, in developed markets, it’s about 17x versus 12x in the emerging markets. Emerging markets are relatively cheap on a PE basis compared to developed markets. We can see that the US PE is about 18x which is pretty darn high.
Momentum: For 12x PE in emerging markets, you get 20% EPS growth
If we look at PE, we also want to look at the EPS. For 12x PE in emerging markets, what are you getting? You’re getting about 20% EPS growth.
And for 18x PE in developed markets, you’re getting about 11% EPS growth as forecasted by analysts.
Again, I’m looking at every company that I can aggregate into a bottom-up aggregate of all companies, and this is weighted, of course, by market cap.
Now, we can also see that developed markets’ EPS expectations are about 12%. But, here, we can see 20% roughly, and then down to 11%. So, actually, if we look at the emerging versus developed, right now, analysts’ expectations are about the same for EPS.
We know from my own dissertation research that analysts were generally optimistic and that EPS actually came in lower. So maybe we’re talking about an 8% EPS growth over that period of time ─ till 2018.
If we look at price, we can not see much difference between developed and emerging markets.
Risk: US tends to have the lowest volatility
Finally, if we look at volatility at the emerging markets’ level versus the developed markets’ level, these two are pretty close but we do have some markets that have very low volatility and US tends to have the lowest volatility, and that’s the volatility over the last 12 months.
We can see some of the higher volatility. Japan is down so low and is highly volatile. And then, in the emerging market space, Latin America tends to be a little bit more volatile than others.
The problem when we look at developed markets is that North America is huge. So if we were to take developed markets and take these three markets and exclude the North America markets, we would end up with developed non-US.
Developed markets are a little bit more expensive
And when we compare emerging markets at about 12% ROE, we see 10% ROE, so developed non-US has a lower ROE.
When we look at the emerging markets, we can see a PE of 12x versus about 15x for the non-US. The PE ratios still are relatively expensive. And if we look at overall growth, these developed non-US companies tend to have a little bit higher growth than the total developed market.
We can see that there, and that’s mainly coming from this massive growth. In fact, this is a big number to consider ─ 18% growth in Asia (that’s developed Asia) and then we have Latin America with the highest EPS growth.
That gives us a little bit of a guide and we can sum up by saying that the ROE of the emerging markets are slightly lower and EPS growth expectations are slightly higher.
Right now, the PE for the emerging markets is about 12x and PE for the developed markets is about 17x.
Developed markets are a little bit more expensive.
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