Monday, August 21, 2006

A Rebalance Soon
Btw US Stocks vs International & Emerging Mkt Stocks

After the sell down in May and June, and the uncertainty over oil prices and interest rate direction, the markets have regathered itself and moved on. Let's look at where the broad equity markets are at the moment. As of the end of July, the US equity markets (S&P 500) are trading at a PE of 17.6x, Price/Book of 2.8x with a dividend yield of 1.9%. International stocks trade at a PE of 15.9x, P/BV of 2.3x and a DY of 2.5%. Emerging markets stocks trade at a PE of 14x, P/BV of 2.3x and a more respectable DY of 2.5%.

Generally, there is some premium attached to US equity but should not be by that large a quantum. What the comparison shows is that there is more value in International and Emerging markets' equity. This does not mean that US stocks will correct to the other two groups' levels, but rather that the other two groups should move higher to match closer to US levels. Emerging markets with a DY of 2.5% and an undemanding PE should find favours with more fund managers.

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