Global equities have been rerated this year, climbing from a recent low of 12x in 2011 to 16x now. While this is still under the long-term median of 17x, it’s another sign of investor confidence in the recovering global economy.

“Japan is highest rated on a trailing PE of 19x. Next most expensive on this crude measure is Australia on 18x, followed by the US on 17x and Europe ex-UK on 17x,” according to a report from Citi. Emerging markets and the UK have the lowest trailing PEs.

Global equities valuation

Japan is also most expensive when you look at cyclically adjusted PE (CAPE), although this measure makes US equities appear more expensive while European and emerging market equities are relatively cheap. The global CAPE is also still below its long term median, 20x as opposed to 24x, up from a low of 12x in 2008. Citi uses trailing PEs and cyclically adjusted global PE because many investors have become hesitant to put too much trust on spot PE measures, although the report notes that some people prefer to look at EPS trends or long-term averages instead of medians.

Equities  World CAPE 1013

Equities  world trailing PE 1013

Citi’s earning forecast

Citigroup Inc (NYSE:C) also argues that earnings next year will finally start to grow, though not as quickly as consensus currently forecasts. “The bottom-up analyst consensus suggests that global EPS will lift off from this plateau. They currently predict 9% growth in 2013 followed by 12% in 2014. However, analysts are usually too optimistic on the profits outlook.”

Equities consensus forecasts citi 1013

Global economic conditions

Citi thinks that 7 percent growth is more realistic, but markets may continue to rise through the analyst downgrades to reflect this real improvement over the last few years when EM EPS growth was flat, Latin America EPS actually pulled back, and the Eurozone fell 20 percent excluding the UK. Japan’s EPS halved before it shot back up this year and 2013 is expected to be a banner year for the country, with EPS growth targets at 57 percent for 2013, up from earlier projections of 35 percent, and as Abenomics continues to revive the economy it looks like the long struggling country could lead EPS growth again next year.