Expensive US equities

In this month newsletter, we are going to look at global equities and their valuation. One interesting information helping to determine whether stocks in a market are expensive or not is to look at the Cyclically Adjusted Price Earing Ratio (CAPE).

CAPE is a valuation measure, which divides the price by the average of ten years of earnings. By taking the average of earnings over a long period, cyclical movements are smoothed out.

The chart below shows the evolution of the CAPE since 1985 for three different equity markets: US, Europe and Switzerland.

Looking at the development since the financial crisis in 2008/2009, where the CAPE reached historically low levels, the rebound has had a different pace in the different regions. While the US rebounded very quickly and has been going strong since, the road to recovery was slower for Europe and Switzerland.

Although the CAPE is by far not the only valuation measure to take into consideration, it illustrates well how we currently evaluate the markets. Despite the recent correction of the beginning of 2018, US equities remain expensive,  while Swiss and even more so European companies still offer upward potential. We have had this view now for quite a while and have hence been, and still are, underweight US equities, while overweighting other regions, especially Europe, in our global equity allocation.

Source : IAM, Datastream