StockTake: How expensive are global stocks?

US markets may not be as overpriced relative to the rest of the world as they seem, says Barclays’ new Gilt Equity Study.

The S&P 500’s cyclically adjusted price/earnings ratio (Cape) is very high, but 19 per cent of the index is made up of the technology sector, which deserves a higher earnings’ multiples than defensive sectors.

Outside the US, technology accounts for just 4.5 per cent of global market value.

Other indices may be dominated by financial or energy stocks.

The valuation gap is "meaningfully smaller" after adjusting for sectors (Scape), said Barclays.

Sector weightings account for nearly half the valuation gap between the US and Britain.

Germany’s technology, healthcare and telecom sectors all trade above their US counterparts, while China and emerging markets appear pricier than Cape ratings suggest.

So do Brazilian equities. Although trading on a Scape of 12, they remain well below the average (16) for emerging markets.

So invest in the S&P 500? Not so fast. Its Scape (21.1) is barely lower than its Cape (21.7), and remains the priciest major market, outside Japan.

The valuation gap may be smaller, but US equities remain expensive.


Less volatility, better returns
Emerging markets should deliver better returns with less volatility in coming years, says the latest Global Investment Returns Yearbook.

Since 1900, emerging markets returned 0.9 per cent less annually than developed markets, but most of that underperformance can be traced to the 1940s. In 1980, they were nearly twice as volatile as developed markets; the difference is now just 10 per cent. Value is a key determinant of emerging market returns – countries with the highest dividend yields returned average annual returns of 31 per cent between 1976 and 2013, compared to 10 per cent for fashionable growth markets. Similarly, countries that had seen lower economic growth boasted highest returns.

Emerging market concerns are currently spooking investors. There have been 16 consecutive weeks of outflows from funds; more money was withdrawn from emerging markets funds in the first five weeks of 2014 than in all of 2013; and indices have underperformed developed markets by nearly 35 per cent over the last three years.

The yearbook, however, indicates value, not GDP growth, drives emerging market returns, implying current travails represent a long-term opportunity.


Men and women driven mad by falling markets
Falling markets are bad for your mental health.

A new study, published in Oxford’s Health Policy and Planning journal, found a 1,000-point fall in the Taiwan stock market resulted in a 4.7 per cent increase in hospitalisations for mental disorders.

One-day 1 per cent declines saw hospitalisations increase, while results were more marked when the index fell five days in a row.

Both men and women were affected.

The results back up a 2013 study that found market declines increase US healthcare costs by $650 million annually due to hospitalisations related to psychological conditions.

Stressed or depressed people should “be encouraged to pay less attention to daily stock market movements”, the researchers suggest.

Day trading – tougher than ever
Day trading, never easy, is more difficult than ever, warns author and trading psychologist Brett Steenbarger.

Back blogging at Traderfeed after a hiatus of over three years, he notes there is less opportunity and more competition. Average S&P 500 trading volumes have decreased by over 25 per cent since 2010, with computers taking over from retail speculators. Volatility has plunged, average daily moves falling by over 25 per cent. Almost half of market moves are occurring overnight, limiting opportunity.

Steenbarger rejects the notion, often peddled by brokerages and “educators”, that trader problems are caused by indiscipline or emotional disruption. Rather, markets change; traders lose their edge. Now more than ever, day traders need a “distinct informational edge”. Without it, “all the coaching, discipline, and psychological insight in the world” are irrelevant.

Betting big on WhatsApp
Facebook $19 billion purchase of WhatsApp may well be a sound long-term bet. We don't pretend to know the future, which is why numbers are always preferable to narratives.

And the numbers are eye-popping. WhatsApp has 450 million users, who, after a free 12-month trial, pay 99 US cents per year. Twelve months ago, it had 200 million users, indicating potential revenues of around $200 million over the last year, or a trailing price/sales ratio (PSR) of 95. That’s incredible. Twitter had a PSR of 34 when it debuted on the market last November, the highest ratio for any major company over the last four decades. Yes, revenues will soar – WhatsApp will likely hit one billion paying users within years. Yes, costs – it has just 55 employees – are low. Yes, Facebook is mainly paying for it in stock, taking advantage of boundless investor enthusiasm for social media firms. But whatever way you look at it, the valuation is unprecedented.