Investing in a Fairly Valued World via Trapeze Asset Management
A Fairly Valued World
For several years we have been arguing that global equity markets are undervalued and represent the best investment alternative given growing corporate profits (S&P 500 Index earnings have nearly doubled in the last five years), a favorable monetary backdrop and a recovering economy.
For the first time since the financial crisis we see most developed markets as fairly valued. The S&P 500 (.INX) has reached our estimate of fair value on three occasions in the last three years (after which corrections followed) but the Euro crisis desynchronized the major global markets. Eurozone markets have caught up to the S&P 500 now that the crisis appears to be in the rearview mirror. Both the Shanghai Stock Exchange Composite Index and the Hang Seng Index currently trade at 11x earnings and are outliers as China faces a self-induced slowdown. Japan, at 24x earnings, is a special situation too as it undergoes a grand monetary experiment.
The current P/E ratios for the major North American and European markets are listed in Table 1. Why do we consider these current P/E ratios to be indicative of fair value? First, these values are hovering around their historical averages.
Second, a P/E ratio between 15-17x makes sense as a proxy for fair value once the ratio itself is deconstructed as,