The upshot for investors: I suggest focusing new allocations on select international markets where valuations are less challenging. In particular, I like international developed equities in Japan and Europe as well as stocks in certain emerging markets. Japanese equity valuations, for instance, are currently among the lowest in the developed world despite Japanese stocks’ (EWJ) recent advance. And as the chart below shows, Japanese and European stock (EZU) valuations are both well below U.S. stock valuations on a price-to-book basis.
Market Realist – The graph above shows that American stocks (IVV) are more expensive than their European (EZU) and Japanese (EWJ) counterparts in terms of the price-to-book ratio. But, as you can see in the chart, the S&P 500 (SPY) has been trading at a premium to the Nikkei 225 and Euro Stoxx over many years. This trend is probably because U.S. stock markets (IVV)(SPY) are at the top of the pecking order for investors. We’d need to investigate further in order to come up with a solid assessment. The policymakers of these countries are taking positive steps to improve their respective economies, warranting a look at these alternatives. Select emerging economies (EEM) are also priced attractively.
At the same time, there are a number of other factors supporting the case for Japanese stocks, including signs that key structural reform initiatives could regain momentum this summer. The government’s proposed growth initiatives due later this summer include a proposed cut in corporate taxes as well as several proposals to improve corporate governance. Meanwhile, recent market-friendly actions by the European Central Bank could help European stocks over the next few months.