Monday, February 4, 2013
U.S. Stocks Look Pricey, But Bargains Beckon Overseas
Stocks are cheap—just not U.S. stocks.
After climbing 5.2% in January, the Standard & Poor's 500-stock index is again nearing all-time highs, spurring many small investors to pile into U.S. stock funds. More than $36 billion flowed into U.S. stock mutual funds and exchange-traded funds, the highest monthly intake ever, according to TrimTabs Investment Research.
But as recoveries in other countries start to take hold, investors might do better looking abroad, say some analysts.
On a longer-term basis, stocks in some other countries look even more attractive.
To project long-term returns, many investment strategists divide the market price by average earnings for the last 10 years, adjusted for inflation. The measure is known as the cyclically adjusted P/E or the "Shiller P/E" after Robert Shiller, the Yale University professor who helped popularize the measure.
On that basis, U.S. stocks look relatively expensive. At the end of January, their cyclically adjusted P/E stood at about 22, versus the historical average of about 16.
That doesn't mean U.S. stocks will necessarily suffer. In the past, when U.S. stocks have had a P/E between 20 and 25, they have gone on to return about 4.9% annually after inflation over the next five years.
But better deals can be had abroad. The cyclically adjusted P/E of battered European countries such as Ireland, Italy, Spain and Portugal all sit below 10, according to Cambria Quantitative Research, which manages $120 million. In the past, when such P/Es have been below 10, the countries went on to return 17% annually after inflation over the next five years, according to Cambria.