Global Equities Cheap Based on PE, EM Cheapest Since 2004

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Barclays analysts Dennis Jose, Joao Toniato, Hajime Kitano and Barry Knapp take a look at the global equity scenario and prefer to look beyond the U.S. for opportunities.

Specifically, they find emerging markets Europe and Japan as being worthwhile investing destinations—of course, for differing reasons.

Global equity: Key rationale

Stocks, as an asset class, still offer scope for appreciation, and are steadily closing the gap with bonds.

global equity vs-bonds

Also, on a global basis, stocks are still below the long-term PE ratio average, allowing room for improvement in prices.

global equity multiple

However, U.S. stocks have outperformed equities from other parts of the globe in the recent past, due in no small measure to the ceaseless efforts of the Fed that led to a jump in asset prices.

According to Barclays, this is about to change, and the baton may now pass from the U.S. to other locations such as the aforementioned emerging markets of Europe and Japan, which both offer the possibility of more worthwhile returns.

Emerging market equities

According to Barclays, the recent meltdown in emerging market equities has made them exceptionally cheap.  Relative to the world index (ex-EM), and from their peak in October 2010, EMs have underperformed by 31 percent, as shown in the graph below:

3-cheap-em global equity

EMs are cheap on the basis of relative valuations too, and their P/B multiple is now 40 percent below that of the U.S. market, their cheapest level since 2004.

Global equity 4-cheap-em-equities-2

These insights make for a compelling case for investing in EM equities.

European equities

According to Barclays, European equities look attractive because of the potential to grow their earnings. This is already being signaled by a boost in the region’s business confidence. Based on historical trends in the business confidence statistics, Barclays estimate earnings growth to improve to 12 percent.

GDP projections also point to an earnings growth of 12 percent in 2014 and ~20 percent in 2015.

Global equity 5-europe-gdp-lag-earnings

In fact, the likely improvement in Europe’s profit margins could close the profitability gap with the U.S., which is at present the largest seen since 1990. Note that U.S. profit margins are widely expected to flatten out in the near future, whereas European margins may now be emerging from a cycle low.


Barclays say that Banks, Construction, Insurance, Financial Services, Autos and Industrials are the sectors that could benefit the most from the above recovery.

Japanese equities

Barclays’ case for Japanese equities is a bit more complex – it appears that Japanese stocks, relative to U.S. stocks, have not been tracking the real interest rate differential between them.


On a larger canvas, looking at business cycles since 1990, Barclays also make the observation that the NIKKEI 225 (INDEXNIKKEI:NI225) Index of Japanese stocks is now making higher highs and higher lows—leading to the belief that “Japanese stocks will emerge from their lost two decades.”

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