Stocktake: Are global stocks cheap?

Stocks have cratered because economies are shutting down and a global recession is coming. How far stocks fall, however, depends not only on news flow, but on valuations.

Stocks were crucified during 2008-09 not only because of the banking collapse, but because equities were extremely expensive. The main reason they stopped plummeting in March 2009 wasn’t because the economic picture suddenly improved – it was because stocks hit their cheapest level in decades.

Pandemic

What about now? US stocks looked extremely pricey at February’s all-time highs; there was little room for error, not to mind a pandemic. Stocks have since plunged, but so will earnings, so you can’t say with any confidence that investors have become unduly pessimistic.

The S&P 500’s cyclically-adjusted price earnings ratio (Cape) has fallen from 33 to 24 – a big drop, but only slightly below its 25-year average. However, European and emerging markets weren’t expensive prior to the coronavirus crash.

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Emerging markets had a Cape ratio of 29 prior to the 2008 crash, compared to just 15 today, while the battering of European stocks mean they now look very cheap relative to history. Is it a buying opportunity for European and emerging market stocks? "Yes", says Research Affiliates founder Rob Arnott. "For US stocks? No."